PROSPECTUS
[GRAPHIC OMITTED]
Bioenvision, Inc.
26,988,742 Shares of Common Stock
---------------
This prospectus covers 26,988,742 shares of our common stock that the
selling stockholders named herein may offer and sell from time to time.
The selling stockholders may sell the shares directly or through
broker-dealers or underwriters, at various times and in various types of public
or private transactions, including in the open market, in negotiated
transactions or by any combination of these methods, at prevailing market prices
or at privately negotiated prices. Each selling stockholder will determine the
selling price of his or its shares at the time of sale, and will receive all of
the net proceeds from the sales and pay all brokerage commissions and similar
selling expenses, if any. We will pay the expenses incident to the registration
of the shares, but we will not receive any proceeds from the sale of the shares
by the selling stockholders.
The selling stockholders and any agents, broker-dealers or underwriters
that are involved in selling their shares may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 and any commissions received by
them and any profit on the resale of the shares may be deemed to be underwriting
commissions or discounts under that Act.
Our common stock is included for quotation on the Nasdaq National Market
under the symbol "BIVN". The last reported sales price of shares of our common
stock on December 7, 2005, was $5.87 per share.
See "Risk Factors" beginning on page 9 to read about risks that you
should consider before buying our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission or other regulatory body has approved or disapproved these securities
or passed upon the adequacy or accuracy of this prospectus. Any representation
to the contrary is a criminal offense.
The date of this prospectus is December 16, 2005
TABLE OF CONTENTS
Page
SUMMARY....................................................................... 2
THE OFFERING...................................................................8
RISK FACTORS...................................................................9
FORWARD-LOOKING STATEMENTS....................................................23
USE OF PROCEEDS...............................................................23
MARKET PRICE OF OUR COMMON STOCK..............................................24
DIVIDEND POLICY...............................................................24
SELLING STOCKHOLDERS..........................................................25
DESCRIPTION OF OUR CAPITAL STOCK..............................................32
SELECTED CONSOLIDATED FINANCIAL DATA..........................................34
SUPPLEMENTARY FINANCIAL INFORMATION...........................................36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................37
BUSINESS......................................................................49
MANAGEMENT....................................................................59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................71
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................73
PLAN OF DISTRIBUTION..........................................................74
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-UNITED
STATES STOCKHOLDERS.........................................................77
LEGAL MATTERS.................................................................79
EXPERTS.......................................................................79
WHERE YOU CAN FIND MORE INFORMATION...........................................79
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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You should rely only on the information contained in this prospectus. We
have not authorized any person to provide you with information that differs from
what is contained in this prospectus. If any person does provide you with
information that differs from what is contained in this prospectus, you should
not rely on it. This prospectus is not an offer to sell or the solicitation of
an offer to buy any securities other than the securities to which it relates,
nor an offer or solicitation in any jurisdiction where offers or sales are not
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, even though this prospectus may be delivered or
shares may be sold under this prospectus at a later date.
SUMMARY
You should read the following summary together with the more detailed
information regarding us and the securities being offered for sale by means of
this prospectus and our financial statements and notes to those statements
appearing elsewhere in this prospectus. The summary highlights information
contained elsewhere in this prospectus. The terms "Bioenvision," "the company,"
"we," "our" and "us" refer to Bioenvision, Inc. and its consolidated
subsidiaries unless the context suggests otherwise. The term "you" refers to a
prospective investor.
We are a product-focused biopharmaceutical company with two approved
cancer therapeutics. In December 2004, the Food and Drug Administration, or FDA,
approved our lead cancer product, clofarabine, for the treatment of pediatric
acute lymphoblastic leukemia, or ALL, in patients who are relapsed or refractory
to at least two prior regimens of treatment. We believe clofarabine is the first
new medicine initially approved in the United States, or U.S., for children with
leukemia in more than a decade. Clofarabine has received Orphan Drug designation
in the U.S. and in the European Union, or E.U. Genzyme Corporation, our
co-development partner, contracted with us and acquired the U.S. and Canadian
marketing rights for clofarabine for certain cancer indications and Genzyme
currently controls U.S. development of clofarabine in these indications. Genzyme
is marketing clofarabine under the brand name Clolar(R) in the U.S. In Europe,
we filed for approval of clofarabine in pediatric ALL with the European
Medicines Evaluation Agency, or EMeA, in July 2004. If approved, we anticipate
commencing sales in Europe during the first half of calendar 2006 through a
dedicated European sales force. We are selling our second product, Modrenal(R),
in the United Kingdom, or U.K., through our sales force of eight sales
specialists. Modrenal(R) is approved in the U.K. for the treatment of
post-menopausal advanced breast cancer following relapse to initial hormone
therapy.
If we receive additional European approvals for our products, we intend
to expand our sales force by adding 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. Further, we intend to penetrate all of the other markets within the E.U.
upon establishing traction in the E.U.'s major markets.
Products and pipeline
Candidate Indication Status U.S. and Canada Ex-U.S. and
rights Canada rights
------------------- ---------------- ---------------------- --------------- -------------
Clofarabine Relapsed or Marketed in U.S. Genzyme Bioenvision
(Clolar(R)) Refractory (pediatric); Filed
Acute in E.U. (pediatric)
Lymphoblastic
Leukemia (ALL)
------------------- ---------------- ---------------------- --------------- -------------
Acute Phase II in E.U. Genzyme Bioenvision
Myelogenous (adult)
Leukemia (AML)
------------------- ---------------- ---------------------- --------------- -------------
Refractory Phase II in U.S. Genzyme Bioenvision
Chronic (adult)
Lymphocytic
Leukemia (CLL)
------------------- ---------------- ---------------------- --------------- -------------
Solid Tumors Phase I (Intravenous) Genzyme Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Solid Tumors Phase I (Oral) Genzyme Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Non-Cancer Developmental Bioenvision Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Modrenal(R) Breast Cancer Marketed in U.K.; Bioenvision Bioenvision
Phase IV in U.K.;
Phase II in U.K.
------------------- ---------------- ---------------------- --------------- -------------
Prostate Cancer Phase II in U.S. Bioenvision Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Virostat Hepatitis C Investigator Bioenvision Bioenvision
Sponsored Phase II
in Europe and Middle
East
------------------- ---------------- ---------------------- --------------- -------------
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Our Products
Clofarabine (Clolar(R))
On December 28, 2004, clofarabine was approved by the FDA after a "fast
track" review for the treatment of pediatric patients, ages one to 21, with
relapsed or refractory ALL after at least two prior regimens. Genzyme currently
maintains rights to market the drug for certain cancer indications in the U.S.
and Canada and we are currently receiving royalties on these sales. Genzyme is
marketing clofarabine under the brand name Clolar(R). We also 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. We expect an
opinion from the EMeA in the second half of calendar 2005. Clofarabine received
Orphan Drug designation in the U.S. and in Europe, which provides ten years of
marketing exclusivity in Europe and seven years of marketing exclusivity in the
U.S. Further, in July 2004, the FDA granted a six-month extension of the
marketing exclusivity for clofarabine in pediatric ALL under the federal Best
Pharmaceuticals for Children Act.
Pediatric leukemia is the most prevalent form of cancer among children
up to age 19 in the U.S. It is estimated that approximately 3,400 children were
diagnosed with leukemia in the U.S. in 2004, with ALL accounting for over 75% of
the incidence rate. Although survival rates for childhood leukemia have improved
significantly since the early 1970's, approximately 20% of pediatric patients
with ALL and 60% of pediatric patients with AML do not achieve long-term
survival and we believe there is a medical need for new agents to treat this
population of patients. Clofarabine is approved for the treatment of pediatric
patients, ages one to 21, with relapsed or refractory ALL after at least two
prior regimens. The adult leukemia market represents a potentially significantly
larger commercial opportunity with over 11,500 patients with AML and over 8,000
patients with CLL, diagnosed each year within the U.S. Based on population and
incidence rates data, we believe that the E.U. patient population with pediatric
leukemias and adult AML and CLL approximates that of the U.S.
Clofarabine is a purine nucleoside analog, which is a small molecule,
that we are developing with Genzyme, our co-development partner, for the
treatment of acute and chronic leukemias, lymphomas and solid tumors.
Clofarabine attacks cancer cells by damaging DNA in cancer cells, preventing DNA
repair by damaged cancer cells, damaging the cancer cell's important control
structures, and initiating the process of programmed cell death, or apoptosis,
in cancer cells. Clofarabine appears to combine many of the favorable properties
of the two most commonly used purine nucleoside analog drugs, fludarabine and
cladribine, but appears to have greater potency at damaging the DNA of leukemia
cells and a broader range of clinical activity.
In the U.S., pivotal Phase II clinical trials were conducted for the
treatment of relapsed or refractory acute leukemia in children and a NDA was
filed by Genzyme with the FDA in March 2004, based upon the interim results of
70 patients enrolled in these two trials. In August of 2004, clinical data on an
additional cohort of 14 patients were submitted to the FDA and of the aggregate
ALL group of 49 patients, a 31% overall response rate was achieved, and of the
aggregate AML group of 35 patients, a 26% overall response rate was achieved.
In Europe, we facilitated an investigator sponsored trial, or an IST, of
clofarabine as first line therapy for older adult patients with AML who were
unsuitable for intensive chemotherapy. The IST was closed to recruitment in
August 2004 because a 67% overall response rate was achieved. This response rate
was more than three times greater than the expected response rate under the
current standard of care for this patient population and the investigator
determined that these positive results warranted accelerated initiation of the
Phase II regulatory study of clofarabine as a first-line treatment for older
adult patients newly diagnosed with AML. We expect to complete the Phase II
trial in calendar 2005 and anticipate that it will form the basis for an E.U.
regulatory submission for approval in this indication.
On December 1, 2004 the FDA's Oncologic Drug Advisory Committee, or
ODAC, convened to determine if clinical data from Phase II trials in relapsed
and refractory pediatric ALL and AML demonstrated a durable clinical response
that would predicate a clinical benefit in future clinical administration. The
panel voted in favor of the approval of clofarabine for pediatric ALL under its
accelerated approval pathway and voted against immediate marketing in pediatric
AML, requesting additional information. In connection with the approval that was
granted by
3
the FDA, Genzyme is required to conduct further controlled clinical studies of
clofarabine to verify and describe its clinical benefit in ALL.
Clofarabine is currently being evaluated in an IST Phase II clinical
trial for refractory CLL in the U.S. In addition, commencing in Q1 2006, we
intend to investigate clofarabine in European Phase II clinical trials for CLL
and indolent lymphoma. In pre-clinical studies, clofarabine has shown anti-tumor
activity against several human cancers, including cancers of the lung, colon,
kidney, breast, pancreas and prostate, as well as its action against leukemia
cells. The initial data from the Phase I clinical trials indicate activity for
clofarabine in certain solid tumor types. We believe this level of activity
against solid tumors distinguishes clofarabine from other purine nucleoside
analogs. We intend to develop clofarabine as a potential drug for the treatment
of certain solid tumors, such as colon, pancreatic, lung, breast and prostate
cancer. Currently, we anticipate the initial Phase I clinical trials for
clofarabine, using both the oral and intravenous formulations, in solid tumors
will be completed by end of calendar year 2005.
Pursuant to the terms of our co-development agreement with Genzyme, the
successor-in-interest to ILEX Oncology, Inc., both parties are required to share
promptly all information, including clinical data, generated under the
co-development program and Genzyme is obligated to pay all of the U.S. and
Canadian research and development costs and 50% of all approved ex-U.S. and
Canada research and development costs (except for Japan and Southeast Asia and
except for non-cancer indications). If additional resources are required above
the agreed upon costs, we may elect to pay these additional costs and certain of
these payments will be credited against future royalty payments to Genzyme at
the rate of $1.50 for every $1.00 of additional expenditures. Under the
co-development agreement with Genzyme, we receive royalties on Genzyme's annual
net sales on a sliding scale based on the level of annual net sales. Similarly,
we pay a royalty to Genzyme and Southern Research Institute, or SRI, the
inventor of clofarabine, on our European annual net sales.
Pursuant to the terms of our co-development agreement with SRI, we have
the exclusive license to market and distribute clofarabine throughout the world
for all human applications except for certain U.S. and Canadian cancer
indications and except for any indications in Japan and Southeast Asia. Our
exclusive license expires upon the last to expire of the patents used or useful
in connection with the development and marketing of clofarabine, which we expect
to expire in 2021. In addition, we hold an exclusive option from SRI to market
and distribute clofarabine in Japan and Southeast Asia for all human
applications. We intend to convert the option to a license upon sourcing an
appropriate co-marketing partner to develop these rights in Japan and Southeast
Asia.
Modrenal(R)
We currently market Modrenal(R) (trilostane) in the U.K. for the
treatment of post-menopausal advanced breast cancer following relapse to initial
hormone therapy. We have a team of eight sales specialists and two marketing
executives selling and marketing Modrenal(R) in the U.K.
Modrenal's(R) approved indication enables us to promote Modrenal(R) for
use immediately after relapse to initial hormone therapy such as tamoxifen or
one of a class of drugs known as aromatase inhibitors (including Faslodex and
Arimidex). However, we are initially positioning Modrenal(R) as a third or
fourth line treatment option in post-menopausal advanced breast cancer. In the
five largest E.U. countries (France, Germany, Italy, Spain and the U.K.), we
believe approximately 520,000 women are currently living with post-menopausal
advanced breast cancer of which over a third require third or fourth line agents
following prior treatment failure.
Modrenal(R) has been extensively studied in clinical trials in the U.S.,
Europe and Australia, and an analysis, known as a meta-analysis, of a series of
these clinical studies, that together included 714 patients with post-menopausal
advanced breast cancer who received Modrenal(R) has been conducted. Overall, a
clinical benefit rate of 35% was achieved in patients with both
hormone-sensitive and hormone-insensitive breast cancers. Generally, a clinical
benefit is achieved when a patient's disease disappears, is decreased by greater
than fifty percent or is stabilized for at least six months. In a sub-set
analysis of these clinical trial data, a clinical benefit rate of 46% was
achieved for 351 patients with hormone-sensitive breast cancer who had responded
to one or more prior hormonal therapies and were given Modrenal(R) upon relapse
of the cancer. In one of the studies which was conducted in Australia, a
clinical benefit rate of 55% was achieved for 64 patients who received
Modrenal(R) having previously responded to tamoxifen and subsequently relapsed.
We believe these data compare favorably to currently marketed
4
aromatase inhibitors and other agents given as second line or subsequent
therapies. Furthermore, Modrenal(R) has an acceptable side-effect profile. On
the basis of these data, Modrenal(R) was granted a product license in the U.K.
for the treatment of post-menopausal advanced breast cancer following relapse to
initial hormone therapy.
We began marketing Modrenal(R) in May 2004 in the U.K. for the treatment
of post-menopausal advanced breast cancer following relapse to initial hormone
therapy. We also intend to seek regulatory approval for Modrenal(R) in the U.S.
as a therapy for hormone-sensitive breast cancers and hormone independent
prostate cancers, but this strategy is dependent upon the results of the ongoing
clinical trials and the resource capability of the Company. Our ongoing clinical
trials in breast cancer target patients that have hormone-sensitive cancers and
have become refractory to prior hormone treatments, such as tamoxifen or any of
the aromatase inhibitors. In addition, there is an ongoing Phase II clinical
trial of Modrenal(R) in the U.S. that is focused on patients who have androgen
independent prostate cancer and have a rising prostate specific antigen, or PSA,
level.
In mid-2005 we began enrollment in a U.K., Phase IV study in
post-menopausal advanced breast cancer, a Phase II study in pre-menopausal
breast cancer and a Phase II study in neo-adjuvent, pre-operative breast cancer.
We plan to use the data from these clinical trials to support a filing process
for mutual recognition for approval of Modrenal(R) on a country-by-country basis
in Europe. Each such approval, if granted, would be based upon Modrenal's(R)
approval in the U.K. for post-menopausal advanced breast cancer following
relapse to initial hormone therapy. The grant of any such approval is entirely
within the control of the individual regulatory authorities.
We have the exclusive right to market and distribute Modrenal(R)
throughout the world for all human applications, except for South Africa and
Japan where the drug is marketed for the treatment of low-renin hypertension.
Our exclusive license expires upon the last to expire of the patents used or
useful in connection with the marketing of Modrenal(R). Given that we have new
patent applications filed, which are subject to issuance, we expect the last of
our underlying patents to expire in 2020.
Other Products and Technologies
We anticipate that revenues derived from our two lead drugs, clofarabine
and Modrenal(R) will permit us to further develop the other products currently
in our product pipeline. The work to date on these compounds has been limited
because of the need to concentrate on clofarabine and Modrenal(R) but management
believes these compounds have potential value.
Virostat
Virostat, especially when irradiated by light, acts by preventing
replication of nucleic acid (DNA and RNA) in pathogens. Investigator sponsored
Phase II clinical trials are ongoing in Europe and the Middle East to study
Virostat's use in treating hepatitis C virus infection and we announced interim
results at the UBS Global Life Sciences Conference in New York on September 28,
2005. Virostat was given to 25 patients with genotype 4 hepatitis C who had
failed a prior treatment, including interferon in many of the patients. Sixteen
(64%) of the patients had cirrhosis. Virostat was given orally for 100 days and
measurement of the viral load was made at 50 days. At 50 days, 22 (88%) patients
had shown a reduction in viral load of greater than 70%. Of these responders, 14
(64%) had a clearance of greater than 90%, with four responders having complete
viral clearance.
Seven of the 25 patients have had viral load measured at 100 days. Six
of these patients show continued reduction in viral load and the seventh
patient, who had been one of the three non-responders at 50 days, had a greater
than 90% reduction in viral load. No major adverse events were noted.
Methylene blue is currently used in several European countries to
inactivate pathogens, notably certain viruses, in fresh frozen plasma. Prior to
the fourth quarter of 2005, we tested for impairment our methylene blue
intangibles acquired in connection with the Pathagon acquisition and determined
that, based on our assumptions, the sum of the expected future cash flows,
undiscounted and pertaining solely and exclusively to approved indications,
exceeded the carrying value of its long-lived assets and therefore we did not
recognize an impairment. Due to the loss of an intellectual property patent suit
relating to the international use of methylene blue in fresh frozen plasma we
re-evaluated the intangible asset relating to methylene blue at June 30, 2005.
At that date, we estimated that our undiscounted future cash flows, again
relating solely and exclusively to approved uses of methylene blue, were less
5
than the carrying value. As a result, we recognized a non-cash impairment loss
of $5,276,000, equal to the difference between the estimated future cash flows
for approved uses of methylene blue, discounted at an appropriate rate, and the
carrying amount of the asset. Making the impairment determination and the amount
of impairment requires significant judgment by management and assumptions with
respect to the future cash flows. Changes in events or circumstances that may
affect long-lived assets makes judgments and assumptions with respect to the
future cash flows highly subjective.
Velostan
Velostan is a cytostatic drug we are investigating in Europe. Velostan
is the first compound in a group of chemically related compounds that are
believed to work by blocking cell division and reversing the malignant process
in the cancer cell. We believe the optical isomer we have developed is more
active and less toxic than its parent compound.
OLIGON(R) Technology
With the acquisition of Pathagon in February 2002, we acquired patents,
technology and technology patents relating to OLIGON(R) anti-infective
technology, and have licensed rights from Oklahoma Medical Research Foundation
for the use of thiazine dyes, including methylene blue, for other anti-infective
uses.
The OLIGON(R) technology is based on the antimicrobial properties of
silver ions. The broad spectrum activity of silver ions against bacteria,
including antibiotic-resistant strains, has been known for decades. OLIGON(R)
materials have application in a wide range of devices and products, including
vascular access devices, urology catheters, pulmonary artery catheters and
thoracic devices, renal dialysis catheters, orthopedic devices and several other
medical and consumer product applications. One application of the OLIGON(R)
technology has been licensed to a third party, which is currently marketing the
technology in its line of short-term vascular access catheters. Six U.S. patents
for the OLIGON(R) technology have been granted and additional patents have been
filed. In addition, patents have been filed in Europe, Canada and Japan.
Gene Therapy Technology
Our product portfolio also includes a variety of gene therapy products
that, we believe, may offer advancements in the field of cancer treatment and
may have additional applications in certain non-cancer diseases such as
diabetes, cystic fibrosis and other auto-immune disorders. Pursuant to a
co-development agreement with the Royal Free and University College Medical
School and a Canadian biotechnology company, we are developing gene vector
technologies which, based on pre-clinical research and early Phase I clinical
trials, we believe have potential in a wide array of clinical conditions. To
date, the technology has undergone small-scale clinical testing with the albumin
and thrombopoietin genes. The results showed the technology is capable of
producing a prolonged elevation in serum albumin levels in cancer and cirrhosis
patients with hypo-albuminemia, a serious physiological disorder.
Animal Health Products
We also have one animal health product, Vetoryl(R) (trilostane), at
market in the United Kingdom 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 U.K., 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 posted more than
$400,000 of sales of the drug. Arnolds has licensed the drug from us for sale in
the U.K. market in consideration of a payment of a 5% royalty on sales.
Separately, in May 2003, we granted to Dechra Pharmaceuticals, PLC, an affiliate
of Arnolds Ltd., the exclusive right to market the drug in the U.S. for $5.5
million of total consideration (including milestone payments) and a royalty of
2%-4% of annual net sales.
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Corporate Information
We were incorporated as Express Finance, Inc. under the laws of the
State of Delaware on August 16, 1996, and changed our name to Ascot Group, Inc.
in August 1998 and further to Bioenvision, Inc. in January 1999. Our principal
executive offices are located at 345 Park Avenue, 41st Floor, New York, New York
10154. Our telephone number is (212) 750-6700 and our fax number is (212)
750-6777. Our website is www.bioenvision.com. Information included or referred
to on our website is not incorporated by reference in or otherwise a part of
this prospectus. Our website address is included in this prospectus as an
inactive textual reference only.
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THE OFFERING
Common stock offered by selling stockholders...... 26,988,742 shares.
Common stock to be outstanding as of December 7,
2005.............................................. 40,760,762 shares.
Use of proceeds................................... We will not receive any
proceeds from the sale
of shares in this
offering. We may receive
consideration upon the
exercise of options and
will receive
consideration upon the
conversion of warrants
which we intend to use
for general corporate
purposes.
Trading........................................... Our common stock
currently trade on the
Nasdaq National Market
under the symbol
"BIVN."
Risk Factors...................................... You should carefully
consider all of the
information in this
prospectus. In
particular, you should
evaluate the information
under "Risk Factors"
beginning on page 9 of
this prospectus before
deciding whether to
invest in our common
stock.
Plan of Distribution.............................. The shares of common
stock offered for resale
may be sold by the
selling stockholders
pursuant to this
prospectus in the manner
described under "Plan of
Distribution" on page
74.
8
RISK FACTORS
You should carefully consider the following risks before you decide to
buy our common stock. All known risks are presented in this prospectus. These
risks may adversely affect our business, financial condition or operating
results. If any of the events we have identified occur, the trading price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.
Risks Related to Our Business
We have a limited operating history, which makes it difficult to evaluate our
business and to predict our future operating results.
Since our inception in August of 1996, we have been primarily engaged in
organizational activities, including developing a strategic operating plan,
entering into various collaborative agreements for the development of products
and technologies, hiring personnel and developing and testing our products. We
have not generated any material revenues to date. Accordingly, we have a limited
operating history upon which an evaluation of our performance and prospects can
be made.
We have incurred significant net losses since commencing business and expect
future losses.
To date, we have incurred significant net losses, including net losses
of approximately $24,263,000 for the fiscal year ended June 30, 2005 and
$4,890,000 for the three months ended September 30, 2005. At September 30, 2005
we had an accumulated deficit of $67,221,000. We anticipate that we may continue
to incur significant operating losses for the foreseeable future. We may never
generate material revenues or achieve profitability and, if we do achieve
profitability, we may not be able to maintain profitability.
Clinical trials for our products are expensive and time consuming, and may not
result in any viable products.
Before obtaining regulatory approval for the commercial sale of a
product, we must demonstrate through pre-clinical testing and clinical trials
that a product candidate is safe and effective for use in humans. Conducting
clinical trials is a lengthy, time-consuming and expensive process. We will
incur substantial expense for, and devote a significant amount of time to
pre-clinical testing and clinical trials. Even with Modrenal(R), which is
approved and marketed by us in the U.K. for the treatment of advanced,
post-menopausal breast cancer, we are conducting a Phase II clinical trial in
the U.S. regarding its treatment of prostate cancer and a Phase II clinical
trial in the U.K. for its treatment of pre-menopausal breast cancer, each of
which is a new potential indication for this approved drug.
The results from pre-clinical testing and early clinical trials have
often not been predictive of results obtained in later clinical trials as a
number of new drugs have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain
necessary regulatory approvals. Data obtained from pre-clinical and clinical
activities are susceptible to varying interpretations, which may delay, limit or
prevent regulatory approval. Regulatory delays or rejections may be encountered
as a result of many factors, including changes in regulatory policy during the
period of product development. Regulatory authorities may require additional
clinical trials, which could result in increased costs and significant
development delays.
Completion of clinical trials for any product may take several or more
years. The length of time generally varies substantially according to the type,
complexity, novelty and intended use of the product candidate. Our commencement
and rate of completion of clinical trials may be delayed by many factors,
including:
o inability of vendors to manufacture sufficient quantities of
materials for use in clinical trials;
o slower than expected rate of patient recruitment or variability
in the number and types of patients in a study;
o inability to adequately follow patients after treatment;
9
o unforeseen safety issues or side effects;
o lack of efficacy during the clinical trials; or
o government or regulatory delays.
A significant portion of our assets relate to ancillary products, which may not
be successfully commercialized.
Our ancillary products include OLIGON, an anti-microbial compound, and
Virostat, an anti-viral agent, respectively, which we acquired in February 2002
in the Pathagon acquisition. At June 30, 2005, due to the loss of an
intellectual property patent suit relating to the international use of Virostat
in fresh frozen plasma, we re-evaluated the fair value of the intangible assets
relating to Virostat. At that date, we estimated that our undiscounted future
cash flows pertaining solely and exclusively to approved uses of Virostat were
less than the carrying value of our long-lived asset. As a result, we recognized
a non-cash impairment loss of $5,276,000, equal to the difference between the
estimated future cash flows related solely to approved uses of Virostat,
discounted at an appropriate rate, and the carrying amount of the asset. Making
the determinations of impairment and the amount of impairment requires
significant judgment by management and assumptions with respect to the future
cash flows of the assets. At June 30, 2005, subsequent to the recognition of the
impairment, the net intangible assets associated with these products amounted to
approximately $7.7 million and constituted approximately 9% of our total assets
and approximately 11% of our stockholders' equity.
We do not currently devote any significant time or resources to the
research and development of OLIGON and only intend to do so if, and to the
extent, we successfully commercialize our lead drugs, clofarabine and
Modrenal(R), over the next two years. Historically, we have not devoted
significant time or resource to the research and development of Virostat but our
management and board of directors is currently considering the appropriate level
of time and resource to be devoted to Virostat over the next two years. Based on
the estimated useful life of these assets of approximately 13 years and market
considerations, no assurance can be given that there will not be a further
impairment of these assets in the future, which could result in a material
impact on our future results of operations. Changes in events or circumstances
that may affect long-lived assets, particularly in the pharmaceutical industry,
makes judgments and assumptions with respect to the future cash flows highly
subjective and may include, but are not limited to, cancellations or
terminations of license agreements or the risk of competition that could render
our products noncompetitive or obsolete.
We depend on our development agreement with Genzyme and if it does not proceed
as planned, we may incur delay in the commercialization of clofarabine, which
would delay our ability to generate revenues and cash flow from the sale of
clofarabine.
We have a co-development agreement with Genzyme, and pursuant to that
agreement, Genzyme and any third party to which Genzyme grants a sublicense or
transfer its obligations, has primary responsibility for conducting clinical
trials and administering regulatory compliance and approval matters in the U.S.
and Canada. While there are target dates for completion, the agreement permits
Genzyme to continue working beyond those dates under certain circumstances. For
example, under the co-development agreement, ILEX (Genzyme's predecessor in
interest) was required to complete Pivotal Phase II Trials not later than
December 31, 2002, but ILEX failed to do so. In this situation the
co-development agreement provides that the milestone shall be adjusted such that
Genzyme (successor in interest to ILEX) receives more time to complete the
pivotal trials if the trials are ongoing at December 31, 2002 and progressing to
completion within a reasonable time thereafter. Further, ILEX was required under
the co-development agreement to have filed a NDA by August 31, 2003, subject to
extension if ILEX continues to use its reasonable efforts to promptly complete
the filing after August 31, 2003. ILEX continued to use its reasonable efforts
to complete the filing after August 31, 2003 and in October 2003, ILEX filed the
first part of a "rolling NDA" with the FDA.
If Genzyme fails to meet its obligations under the co-development
agreement, we could lose valuable time in developing clofarabine for
commercialization both in the U.S. and in Europe. We can not provide assurance
that Genzyme will not fail to meet its obligations under the co-development
agreement. Development of compounds to the stage of approval includes inherent
risk at each stage of development that FDA, in its discretion, will mandate a
requirement not foreseeable by us or by Genzyme. There would also be testing
delays if, for example, our sources
10
of drug supply could not produce enough clofarabine to support the then ongoing
clinical trials being conducted. If this were to occur, it could have a material
adverse effect on our ability to develop clofarabine, obtain necessary
regulatory approvals, and generate sales and cash flow from the sale of
clofarabine.
If delays in completion constitute a breach by Genzyme or there are
certain other breaches of the co-development agreement by Genzyme, then, at our
discretion, the primary responsibility for completion would revert to us, but
there is no assurance that we would have the financial, managerial or technical
resources to complete such tasks in timely fashion or at all.
We have limited experience in developing products and may be unsuccessful in our
efforts to develop products.
To achieve profitable operations, we, alone or with others, must
successfully develop, clinically test, market and sell our products. We are
developing clofarabine with Genzyme, our U.S. co-development partner since its
acquisition of ILEX Oncology, which occurred on December 21, 2004. No assurance
can be given that the operational and managerial relations with Genzyme will
proceed favorably or that the timeline for development of clofarabine will not
be elongated now that Genzyme has replaced ILEX as our U.S. cancer marketing
partner. If the U.S. regulatory timeline is elongated, this could materially and
adversely affect the European regulatory timeline for the approval of
clofarabine.
With respect to our co-lead drug, Modrenal(R), we currently have an
Investigational New Drug Application filed with the FDA to conduct a Phase II
Clinical Trial in the U.S. to determine efficacy of Modrenal(R) in prostate
cancer patients. This Phase II Clinical Trial is being conducted at the
Massachusetts General Hospital in Boston, MA. To our knowledge, Modrenal(R) has
not been tested in this indication in the past and there can be no assurance
that Modrenal(R) will be an effective therapy in prostate cancer. Further, our
long-term drug development objectives for Modrenal(R) include attempting to test
the drug and get approval in the U.S. for treatment of advanced post-menopausal
breast cancer patients. These trials will take significant time and resources
and no assurance can be given that developing the drug in this indication will
result in a U.S. approval for Modrenal(R) in advanced post-menopausal breast
cancer patients.
Generally, most products resulting from our or our collaborative
partners' product development efforts are not expected to be available for sale
for at least several years, if at all. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons, including:
o discovery during pre-clinical testing or clinical trials that the
products are ineffective or cause harmful side effects;
o failure to receive necessary regulatory approvals;
o inability to manufacture on a large or economically feasible scale;
o failure to achieve market acceptance; or
o preclusion from commercialization by proprietary rights of third
parties.
Most of the existing and future products and technologies developed by
us will require extensive additional development, including pre-clinical testing
and clinical trials, as well as regulatory approvals, prior to
commercialization. Our product development efforts may not be successful. We may
fail to receive required regulatory approvals from U.S. or foreign authorities
for any indication. Any products, if introduced, may not be capable of being
produced in commercial quantities at reasonable costs or being successfully
marketed. The failure of our research and development activities to result in
any commercially viable products or technologies would materially adversely
affect our future prospects.
11
Our industry is subject to extensive government regulation and our products
require other regulatory approvals which makes it more expensive to operate our
business.
Regulation in General. Virtually all aspects of our business are
regulated by federal, state and local statutes and governmental agencies in the
U.S. and other countries. Failure to comply with applicable statutes and
government regulations could have a material adverse effect on our ability to
develop and sell products which would have a negative impact on our cash flow.
The development, testing, manufacturing, processing, quality, safety, efficacy,
packaging, labeling, record-keeping, distribution, storage and advertising of
pharmaceutical products, and disposal of waste products arising from these
activities, are subject to regulation by one or more federal agencies. These
activities are also regulated by similar state and local agencies and equivalent
foreign authorities. In our material contracts with vendors providing any
portion of these types of services, we seek assurances that our vendors comply
and will continue to maintain compliance with all applicable rules and
regulations. This is the case, for example, with respect to our contracts with
Ferro Pfanstiehl and Penn Pharmaceuticals. No assurance can be given that our
most significant vendors will continue to comply with these rules and
regulations.
FDA Regulation. All pharmaceutical manufacturers in the U.S. are subject
to regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act. Under the Act, the federal government has extensive administrative
and judicial enforcement powers over the activities of pharmaceutical
manufacturers to ensure compliance with FDA regulations. Those powers include,
but are not limited to the authority to:
o initiate court action to seize unapproved or non-complying products;
o enjoin non-complying activities;
o halt manufacturing operations that are not in compliance with current
good manufacturing practices prescribed by the FDA;
o recall products which present a health risk; and
o seek civil monetary and criminal penalties.
Other enforcement activities include refusal to approve product
applications or the withdrawal of previously approved applications. Any
enforcement activities, including the restriction or prohibition on sales of
products marketed by us or the halting of manufacturing operations of us or our
collaborators, would have a material adverse effect on our ability to develop
and sell products which would have a negative impact on our cash flow. In
addition, product recalls may be issued at our discretion or by the FDA or other
domestic and foreign government agencies having regulatory authority for
pharmaceutical product sales. Recalls may occur due to disputed labeling claims,
manufacturing issues, quality defects or other reasons. Recalls of
pharmaceutical products marketed by us may occur in the future. Any product
recall could have a material adverse effect on our revenue and cash flow.
FDA Approval Process. We have a variety of products under development,
including line extensions of existing products, reformulations of existing
products and new products. All "new drugs" must be the subject of an
FDA-approved new drug application before they may be marketed in the U.S. All
generic equivalents to previously approved drugs or new dosage forms of existing
drugs must be the subject of an FDA-approved abbreviated new drug application
before they may by marketed in the U.S. In both cases, the FDA has the authority
to determine what testing procedures are appropriate for a particular product
and, in some instances, has not published or otherwise identified guidelines as
to the appropriate procedures. The FDA has the authority to withdraw existing
new drug application and abbreviated application approvals and to review the
regulatory status of products marketed under the enforcement policy. The FDA may
require an approved new drug application or abbreviated application for any drug
product marketed under the enforcement policy if new information reveals
questions about the drug's safety or effectiveness. All drugs must be
manufactured in conformity with current good manufacturing practices and drugs
subject to an approved new drug application or abbreviated application must be
manufactured, processed, packaged, held and labeled in accordance with
information contained in the new drug application or abbreviated application.
12
The required product testing and approval process can take a number of
years and require the expenditure of substantial resources. Testing of any
product under development may not result in a commercially-viable product.
Further, we may decide to modify a product in testing, which could materially
extend the test period and increase the development costs of the product in
question. Even after time and expenses, regulatory approval by the FDA may not
be obtained for any products we develop. In addition, delays or rejections may
be encountered based upon changes in FDA policy during the period of product
development and FDA review. Any regulatory approval may impose limitations in
the indicated use for the product. Even if regulatory approval is obtained, a
marketed product, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections. Subsequent discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.
Foreign Regulatory Approval. Even if required FDA approval has been
obtained with respect to a product, foreign regulatory approval of a product
must also be obtained prior to marketing the product internationally. Foreign
approval procedures vary from country to country and the time required for
approval may delay or prevent marketing. In certain instances, we or our
collaborative partners may seek approval to market and sell some of our products
outside of the United States before submitting an application for approval to
the FDA. The clinical testing requirements and the time required to obtain
foreign regulatory approvals may differ from that required for FDA approval.
Although there is now a centralized European Union approval mechanism for new
pharmaceutical products in place, each European Union country may nonetheless
impose its own procedures and requirements, many of which are time consuming and
expensive, and some European Union countries require price approval as part of
the regulatory process. Thus, there can be substantial delays in obtaining
required approval from both the FDA and foreign regulatory authorities after the
relevant applications are filed.
Changes in Requirements. The regulatory requirements applicable to any
product may be modified in the future. We cannot determine what effect changes
in regulations or statutes or legal interpretations may have on our business in
the future. Changes could require changes to manufacturing methods, expanded or
different labeling, the recall, replacement or discontinuation of certain
products, additional record keeping and expanded documentation of the properties
of certain products and scientific substantiation. Any changes or new
legislation could have a material adverse effect on our ability to develop and
sell products and, therefore, generate revenue and cash flow.
The products under development by us may not meet all of the applicable
regulatory requirements needed to receive regulatory marketing approval. Even
after we expend substantial resources on research, clinical development and the
preparation and processing of regulatory applications, we may not be able to
obtain regulatory approval for any of our products. Moreover, regulatory
approval for marketing a proposed pharmaceutical product in any jurisdiction may
not result in similar approval in other jurisdictions. Our failure to obtain and
maintain regulatory approvals for products under development would have a
material adverse effect on our ability to develop and sell products and,
therefore, generate revenue and cash flow.
We may not be successful in receiving orphan drug status for certain of our
products or, if that status is obtained, fully enjoying the benefits of orphan
drug status.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a rare disease or condition. A disease or condition that
affects populations of fewer than 200,000 people in the U.S. generally
constitutes a rare disease or condition. We may not be successful in receiving
orphan drug status for certain of our products. Orphan drug designation must be
requested before submitting a new drug application. After the FDA grants orphan
drug designation, the generic identity of the therapeutic agent and its
potential orphan use are publicized by the FDA. Under current law, orphan drug
status is conferred upon the first company to receive FDA approval to market the
designated drug for the designated indication. Orphan drug status also grants
marketing exclusivity in the U.S. for a period of seven years following approval
of the new drug application, subject to limitations. Orphan drug designation
does not provide any advantage in, or shorten the duration of, the FDA
regulatory approval process. Although obtaining FDA approval to market a product
with orphan drug status can be advantageous, the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug status
and marketing approval may not remain in effect in the future.
Our business strategy involves obtaining orphan drug designation for
certain of the oncology products we have under development. Although clofarabine
has received orphan drug designation with the FDA and EMeA, we
13
do not know whether any of our other products will receive an orphan drug
designation. Orphan drug designation does not prevent other manufacturers from
attempting to develop similar drugs for the designated indication or from
obtaining the approval of a new drug application for their drug prior to the
approval of our new drug application. If another sponsor's new drug application
for a competing drug in the same indication is approved first, that sponsor is
entitled to exclusive marketing rights if that sponsor has received orphan drug
designation for its drug. In that case, the FDA would refrain from approving an
application by us to market our competing product for seven years, subject to
limitations. Competing products may receive orphan drug designations and FDA
marketing approval before the products under development by us.
New drug application approval for a drug with an orphan drug designation
does not prevent the FDA from approving the same drug for a different
indication, or a molecular variation of the same drug for the same indication.
Because doctors are not restricted by the FDA from prescribing an approved drug
for uses not approved by the FDA, it is also possible that another company's
drug could be prescribed for indications for which products developed by us have
received orphan drug designation and new drug application approval, and the same
is true with the EMeA in Europe. Prescribing of approved drugs for unapproved
uses, commonly referred to as "off label" sales, could adversely affect the
marketing potential of products that have received an orphan drug designation
and new drug application approval. In addition, new drug application approval of
a drug with an orphan drug designation does not provide any marketing
exclusivity in foreign markets.
The possible amendment of the Orphan Drug Act by the United States
Congress has been the subject of frequent discussion. Although no significant
changes to the Orphan Drug Act have been made for a number of years, members of
Congress have from time to time proposed legislation that would limit the
application of the Orphan Drug Act. The precise scope of protection that may be
afforded by orphan drug designation and marketing approval may be subject to
change in the future.
The use of our products may be limited or eliminated by professional guidelines
which would decrease our sales of these products and, therefore, our revenue and
cash flows.
In addition to government agencies, private health/science foundations
and organizations involved in various diseases may also publish guidelines or
recommendations to the healthcare and patient communities. These private
organizations may make recommendations that affect the usage of therapies, drugs
or procedures, including products developed by us. These recommendations may
relate to matters such as usage, dosage, route of administration and use of
concomitant therapies. Recommendations or guidelines that are followed by
patients and healthcare providers and that result in, among other things,
decreased use or elimination of products developed by us could have a material
adverse effect on our revenue and cash flows. For example, if clofarabine is
definitively determined in clinical trials to be an active agent to treat solid
tumor cancer patients, but the required dose is high, private healthcare/science
foundations could recommend various other regimens of treatment which may from
time to time show activity at lower doses.
Generic products which third parties may develop may render our products
noncompetitive or obsolete.
An increase in competition from generic pharmaceutical products could
have a material adverse effect on our ability to generate revenue and cash flow.
For example, many of the indications in which clofarabine and Modrenal(R), our
co-lead drugs, have demonstrated activity are areas of unmet clinical need, such
as clofarabine's application to pediatric acute leukemias in which, initially,
the drug will be used as a salvage therapy, after other regimens of treatment
have failed. Our lead investigators, who have assisted with the development of
Modrenal(R), envision, initially, that Modrenal(R) would be used as second or
third line therapy, only after patients with advanced post-menopausal breast
cancer receive regimens of tamoxifen and/or aromatase inhibitors (or similar
drug) treatments. If generic drug companies develop a compound which is more
effective than either clofarabine or Modrenal(R) in these areas of unmet
clinical need, or equally as effective but at lower doses, it could adversely
affect our market and/or render our drugs obsolete.
14
Because many of our competitors have substantially greater capabilities and
resources than us, they may be able to develop products before us or develop
more effective products or market them more effectively, which would adversely
affect our ability to generate revenue and cash flow.
Competition in our industry is intense. Potential competitors in the
U.S. and Europe are numerous and include pharmaceutical, chemical and
biotechnology companies, most of which have substantially greater capital
resources, marketing experience, research and development staffs and facilities
than us. Potential competitors for certain indications of our lead drugs
include, with respect to clofarabine, Schering AG, which markets fludarabine,
and certain generic drug companies in Europe which could market fludarabine upon
expiry of the patent protections held by Schering AG. Potential competitors with
respect to Modrenal(R) include Astra-Zeneca and Novartis, which market tamoxifen
and other aromatase inhibitors, which could be used by clinicians as first and
second line therapies in patients with hormone sensitive, advanced,
post-menopausal breast cancer prior to a Modrenal(R) regimen of treatment. No
assurance can be given that the ongoing business activities of our competitors
will not have a material adverse effect on our business prospects and
projections going forward.
Although we seek to limit potential sources of competition by developing
products that are eligible for orphan drug designation and new drug application
approval or other forms of protection, our competitors may develop similar
technologies and products more rapidly than us or market them more effectively.
Competing technologies and products may be more effective than any of those that
are being or will be developed by us. The generic drug industry is intensely
competitive and includes large brand name and multi-source pharmaceutical
companies. Because generic drugs do not have patent protection or any other
market exclusivity, our competitors may introduce competing generic products,
which may be sold at lower prices or with more aggressive marketing. Conversely,
as we introduce branded drugs into our product portfolio, we will face
competition from manufacturers of generic drugs which may claim to offer
equivalent therapeutic benefits at a lower price. The aggressive pricing
activities of our generic competitors could have a material adverse effect on
our operations, revenue and cash flow.
If we are unable to respond to rapid technological change and evolving
therapies, our technologies and products could become less competitive or
obsolete and our revenues and results of operations will be adversely affected.
The pharmaceutical industry is characterized by rapid and significant
technological change. We expect that pharmaceutical technology will continue to
develop rapidly, and our future success will depend on our ability to develop
and maintain a competitive position. Technological development by others may
result in products developed by us, branded or generic, becoming obsolete before
they are marketed or before we recover a significant portion of the development
and commercialization expenses incurred with respect to these products.
Alternative therapies or new medical treatments could alter existing treatment
regimes, and thereby reduce the need for one or more of the products developed
by us, which would adversely affect our revenue and cash flow. See also
"--Generic products which third parties may develop may render our products
noncompetitive or obsolete" above.
We depend on others for clinical testing of our products which could delay our
ability to develop products.
We do not currently have any internal product testing capabilities. Our
inability to retain third parties for the clinical testing of products on
acceptable terms would adversely affect our ability to develop products. Any
failures by third parties to adequately perform their responsibilities may delay
the submission of products for regulatory approval, impair our ability to
deliver products on a timely basis or otherwise impair our competitive position.
Our dependence on third parties for the development of products may adversely
affect our potential profit margins and our ability to develop and deliver
products on a timely basis.
We rely on a limited number of manufacturers to operate our business and our
products have not been manufactured in significant quantities. If these
manufacturers experience problems or favor our competitors, we could fail to
obtain sufficient quantities of products we require to operate our business
successfully.
We have never manufactured any products in commercial quantities, and
the products being developed by us may not be suitable for commercial
manufacturing in a cost-effective manner. Manufacturers of products developed by
us will be subject to current good manufacturing practices prescribed by the FDA
or other rules and regulations prescribed by foreign regulatory authorities. We
may not be able to enter into or maintain relationships either domestically or
abroad with manufacturers whose facilities and procedures comply or will
continue to comply
15
with current good manufacturing practices or applicable foreign requirements.
Failure by a manufacturer of our products to comply with current good
manufacturing practices or applicable foreign requirements could result in
significant time delays or our inability to commercialize or continue to market
a product and could have a material adverse effect on our sales of products and,
therefore, our cash flow. In the U.S., failure to comply with current good
manufacturing practices or other applicable legal requirements can lead to
federal seizure of violative products, injunctive actions brought by the federal
government, and potential criminal and civil liability on the part of a company
and our officers and employees.
We have limited sales and marketing capability, and may not be successful in
selling or marketing our products.
The creation of infrastructure to commercialize oncology products is a
difficult, expensive and time-consuming process. We may not be able to establish
direct or indirect sales and distribution capabilities outside of the UK or be
successful in gaining market acceptance for proprietary products or for other
products. We currently have very limited sales and marketing capabilities
outside of the UK. We currently employ eight full-time sales employees and two
full-time marketing employees. To market any products directly, we will need to
develop a more fulsome marketing and sales force with technical expertise and
distribution capability or contract with other pharmaceutical and/or health care
companies with distribution systems and direct sales forces. To the extent that
we enter into co-promotion or other licensing arrangements, any revenues to be
received by us will be dependent on the efforts of third parties. The efforts of
third parties may not be successful. Our failure to establish marketing and
distribution capabilities or to enter into marketing and distribution
arrangements with third parties could have a material adverse effect on our
revenue and cash flows.
We are dependent on certain key personnel and the loss of one or more these
individuals could disrupt our operations and adversely affect our financial
results.
We are highly dependent on our Chief Executive Officer to develop our
lead drug. Dr. Wood has an employment agreement with us, dated December 31,
2002, for an initial term of one year which automatically extends for additional
one year periods until either party gives the other written notice of
termination at least 90 days prior to the end of the current term. Dr. Wood is
not near retirement age and he does not, to our knowledge, plan on leaving us in
the near future. Dr. Wood is one of our founders and he is intimately familiar
with the science that underlies our lead drugs and ancillary technologies. He
also maintains a position on the clofarabine management team that is responsible
for all drug development activities relating to that lead drug, and has been
instrumental in the development and maintenance of our key relationships within
the scientific research and medical communities, and those with our vendors,
inventors, co-development partners and licensors. If Dr. Wood was no longer
employed by us, the development of our drugs would be significantly delayed and
otherwise would be adversely impacted, and we may be unable to maintain and
develop these important relationships.
In addition, we will be required to hire additional qualified scientific
and technical personnel, as well as personnel with expertise in clinical testing
and government regulation to expand our research and development programs and
pursue our product development and marketing plans. There is intense competition
for qualified personnel in the areas of our activities, and there can be no
assurance that we will be able to attract and retain the qualified personnel
necessary for the development of its business. We face competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and research institutions. The failure to attract and retain key
scientific, marketing and technical personnel would have a material adverse
effect on the development of our business and our ability to develop, market and
sell our products. See also "- We have limited sales and marketing capability,
and may not be successful in selling or marketing our products" above.
Our management and internal systems might be inadequate to handle our potential
growth.
Our success will depend in significant part on the expansion of our
operations and the effective management of growth. This growth has and will
continue to place a significant strain on our management and information systems
and resources and operational and financial systems and resources. To manage
future growth, our management must continue to improve our operational and
financial systems and expand, train, retain and manage our employee base. Our
management may not be able to manage our growth effectively. If our systems,
procedures, controls, and resources are inadequate to support our operations,
our expansion would be halted or delayed and we could lose our opportunity to
gain significant market share or the timing with which we would
16
otherwise gain significant market share. Any inability to manage growth
effectively may harm our ability to institute our business plan. The strain on
our systems, procedures, controls and resources is further heightened by the
fact that our executive office and operational development facilities are
located in separate time zones (New York, New York and Edinburgh, Scotland,
respectively).
We depend on patent and proprietary rights to develop and protect our
technologies and products, which rights may not offer us sufficient protection.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success will depend on our ability to obtain and enforce protection for
products that we develop under U.S. and foreign patent laws and other
intellectual property laws, preserve the confidentiality of our trade secrets
and operate without infringing the proprietary rights of third parties. Through
our current license agreements, we have acquired the right to utilize the
technology covered by issued patents and patent applications, as well as
additional intellectual property and know-how that could be the subject of
further patent applications in the future. Several of the original patents to
Modrenal(R) have expired in the U.S. and foreign countries. Thus, we and our
licensor, Stegram Pharmaceutical Ltd., are pursuing patent applications to
specific uses, combination therapy and dosages or formulations of Modrenal(R).
We cannot guarantee that such applications will result in issued patents or that
such patents if issued will provide adequate protection against competitors.
Patents may not be issued from these applications and issued patents may not
give us adequate protection or a competitive advantage. Issued patents may be
challenged, invalidated, infringed or circumvented, and any rights granted
thereunder may not provide us with competitive advantages. Parties not
affiliated with us have obtained or may obtain U.S. or foreign patents or
possess or may possess proprietary rights relating to products being developed
or to be developed by us. Patents now in existence or hereafter issued to others
may adversely affect the development or commercialization of products developed
or to be developed by us. Our planned activities may infringe patents owned by
others. Our patents to clofarabine are licensed from SRI. The current projected
expiration date of the license is March 2021. These patents cover pharmaceutical
compositions and methods of using clofarabine. We cannot guarantee that these
patents would survive an attack on their validity or that they will provide a
competitive advantage over our competitors. Moreover, we cannot guarantee that
SRI was the first to invent the subject matter of these patents. In addition, we
are aware of a third party U.S. patent which is directed to the treatment of
chronic myeloid leukemia, or CML, using specific doses of clofarabine. We
believe that our development and marketing of clofarabine for treatment of acute
leukemias will not infringe any of the claims of this U.S. patent. Further, we
believe that our development and marketing of clofarabine for treatment of
chronic lymphocytic leukemia will not infringe any of the claims of this U.S.
patent. If this patent is asserted against us, even though we may be successful
in defending against such an assertion, our defense would require substantial
financial and human resources. In addition, we may need a license to this patent
to use the claimed dose in the treatment of CML. However, we do not know if such
a license is available at commercially reasonable terms, if at all.
We could incur substantial costs in defending infringement suits brought
against us or any of our licensors or in asserting any infringement claims that
we may have against others. We could also incur substantial costs in connection
with any suits relating to matters for which we have agreed to indemnify our
licensors or distributors. An adverse outcome in any litigation could have a
material adverse effect on our ability to sell products or use patents in the
future. In addition, we could be required to obtain licenses under patents or
other proprietary rights of third parties. These licenses may not be made
available on terms acceptable to us, or at all. If we are required to, and do
not obtain any required licenses, we could be prevented from, or encounter
delays in, developing, manufacturing or marketing one or more products.
We also rely upon trade secret protection for our confidential and
proprietary information. Others may independently develop substantially
equivalent proprietary information and techniques or gain access to our trade
secrets or disclose our technology. We may not be able to meaningfully protect
our trade secrets which could limit our ability to exclusively produce products.
We require our employees, consultants, members of the scientific
advisory board and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of employment or consulting
relationships or a collaboration with us. These agreements may not provide
meaningful protection of our
17
trade secrets or adequate remedies in the event of unauthorized use or
disclosure of confidential and proprietary information.
Our international operations subject us to social, political and economic risks
of doing business in foreign countries.
We have the right to manufacture, market and distribute our lead drugs,
clofarabine and Modrenal(R), in territories outside of the U.S. Specifically, we
currently market Modrenal(R) in the United Kingdom and upon receiving European
approval for clofarabine, we intend to market the drug throughout Europe.
Further, nearly half of our employees are employed by Bioenvision Limited, our
wholly-owned subsidiary with offices in Edinburgh, Scotland.
Because we have international operations in the conduct of our business,
we are subject to the risks of conducting business in foreign countries,
including:
o difficulty in establishing or managing distribution relationships;
o different standards for the development, use, packaging, pricing and
marketing of our products and technologies;
o our inability to locate qualified local employees, partners,
distributors and suppliers;
o the potential burden of complying with a variety of foreign laws, trade
standards and regulatory requirements, including the regulation of
pharmaceutical products and treatment; and
o general geopolitical risks, such as political and economic instability,
changes in diplomatic and trade relations, and foreign currency risks.
We do not engage in forward currency transactions which means we are
susceptible to fluctuations in the U.S. dollar against foreign currencies such
as the pound sterling. Accordingly, as the value of the dollar becomes weaker
against the pound sterling, ongoing services provided by our UK employees,
Clinical research organizations and other service providers become more
expensive to us. No assurance can be given that the U.S. dollar will not
continue to weaken which could have a material adverse effect on the costs
associated with our drug development activities.
We cannot predict our future capital needs and we may not be able to secure
additional financing which could affect our ability to operate as a going
concern.
At September 30, 2005, we had stockholders' equity of approximately
$62,156,000 and net working capital of approximately $55,676,000. However, we
may need additional financing to continue to fund the research and development
and marketing programs for our products and to generally expand and grow our
business. For example, we will need to employ a European sales force within the
next twelve months to capitalize on the commercial potential for clofarabine and
Modrenal(R) if and to the extent our lead drugs are at market in Europe by mid
2006. To the extent that we will be required to fund operating losses, our
financial position would deteriorate. There can be no assurance that we will be
able to find significant additional financing at all or on terms favorable to
us. If equity securities are issued in connection with a financing, dilution to
our stockholders would result, and if additional funds are raised through the
incurrence of debt, we may be subject to restrictions on our operations and
finances. Furthermore, if we do incur debt, we may be limiting our ability to
repurchase capital stock, engage in mergers, consolidations, acquisitions and
asset sales, or alter our lines of business or accounting methods, even though
these actions would otherwise benefit our business.
If adequate financing is not available, we may be required to delay,
scale back or eliminate some of our research and development programs, to
relinquish rights to certain technologies or products, or to license third
parties to commercialize technologies or products that we would otherwise seek
to develop. Any inability to obtain
18
additional financing, if required, would have a material adverse effect on our
ability to continue our operations and implement our business plan.
The prices we charge for our products and the level of third-party reimbursement
may decrease and our revenues could decrease.
Our ability to commercialize products successfully depends in part on
the price we may be able to charge for our products and on the extent to which
reimbursement for the cost of our products and related treatment will be
available from government health administration authorities, private health
insurers and other third-party payors. We believe that Government officials and
private health insurers are increasingly challenging the price of medical
products and services. Significant uncertainty exists as to the pricing
flexibility which distributors will have with respect to newly approved health
care products as well as the reimbursement status for such approved healthcare
products.
Third-party payors may attempt to control costs further by selecting
exclusive providers of their pharmaceutical products. If third-party payors were
to make this type of arrangement with one or more of our competitors, they would
not reimburse patients for purchasing our competing products. For example, if a
third-party payor in the U.K. were to pay patients for regimens of aromatase
inhibitor treatment but not treatments of Modrenal(R), this would cause a
decline in sales of Modrenal(R). This lack of reimbursement would diminish the
market for products developed by us and would have a material adverse effect on
us.
Our products may be subject to recall.
Product recalls may be issued at our discretion or by the FDA, the FTC
or other government agencies having regulatory authority for product sales.
Product recalls, if any in the future, may harm our reputation and cause us to
lose development opportunities, or customers or pay refunds. Products may need
to be recalled due to disputed labeling claims, manufacturing issues, quality
defects, or other reasons. We do not carry any insurance to cover the risk of
potential product recall. Any product recall could have a material adverse
effect on us, our prospects, our financial condition and results of operations.
We may face exposure from product liability claims and product liability
insurance may not be sufficient to cover the costs of our liability claims
related to technologies or products.
We face exposure to product liability claims if the use of our
technologies or products or those we license from third parties is alleged to
have resulted in adverse effects to users of such products. Product liability
claims may be brought by clinical trial participants, although to date, no such
claims have been brought against us. If any such claims were brought against us,
the cost of defending such claims may adversely affect our business. Regulatory
approval for commercial sale of our products does not mitigate product liability
risks. Any precautions we take may not be sufficient to avoid significant
product liability exposure. Although we have obtained product liability and
clinical trial insurance on our technologies and products at levels with which
management deems reasonable, no assurance can be given that this insurance will
cover any particular claim or that we have obtained an appropriate level of
liability insurance coverage for our development activities. We currently
maintain three million dollars per year, claims made product liability insurance
coverage which we believe is adequate. Existing coverage may not be adequate as
we further develop our products. In the future, adequate insurance coverage or
indemnification by collaborative partners may not be available in sufficient
amounts, or at acceptable costs, if at all. To the extent that product liability
insurance, if available, does not cover potential claims, we will be required to
self-insure the risks associated with those claims. The successful assertion of
any uninsured product liability or other claim against us could limit our
ability to sell our products or could cause monetary damages. In addition,
future product labeling may include disclosure of additional adverse effects,
precautions and contra indications, which may adversely impact product sales.
The pharmaceutical industry has experienced increasing difficulty in maintaining
product liability insurance coverage at reasonable levels, and substantial
increases in insurance premium costs, in many cases, have rendered coverage
economically impractical.
19
Complying with changing corporate governance regulations, including an
evaluation of our internal controls, may adversely affect our business and
operations.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and NASDAQ market rules, are creating uncertainty for companies
such as ours. These new or changed laws, regulations and standards are subject
to varying interpretations in many cases due to their lack of specificity. As a
result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We are committed to
maintaining high standards of corporate governance, internal control and public
disclosure. As a result, we intend to invest resources to comply with evolving
laws, regulations and standards, and this investment may result in increased
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. If our efforts to comply
with new or changed laws, regulations and standards differ from the activities
intended by regulatory or governing bodies, our reputation may be harmed and our
operations and revenues may be adversely affected.
We need to improve our internal controls over financial reporting.
In connection with its review of our consolidated financial statements
as of and for the three and nine month periods ended March 31, 2004, Grant
Thornton LLP, then our registered independent public accounting firm, advised
the Audit Committee and management of certain significant internal control
deficiencies that they considered to be, in the aggregate, a material weakness,
under standards established by the American Institute of Certified Public
Accountants, 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. A material weakness is a significant
deficiency in one or more of the internal control components that alone or in
the aggregate precludes the entity's internal control from reducing to an
appropriately low level the risk that material misstatements in the financial
statements will not be prevented or detected on a timely basis. In response to
the observations made by Grant Thornton LLP, we undertook a re-evaluation of our
internal controls and procedures relating to those observations and implemented
such enhancements as the review suggested were appropriate including the hiring
a controller and a director of financial reporting.
As of March 31, 2005, the Company identified the following material
weakness:
o Failure to ensure the correct application of SFAS 109
"Accounting for Income Taxes" with respect to purchase business
combinations and failure to correct that error subsequently
resulting from the lack of personnel knowledgeable in the
accounting for income taxes.
As of June 30, 2005 the Company identified the following material
weakness:
o We did not maintain effective controls relating to the timely
identification, evaluation and accurate resolution of
non-routine or complex accounting matters, specifically, (i) we
did not timely identify and evaluate a change of circumstances
that resulted in an impairment of our intangible assets relating
to certain patents, (ii) we did not timely identify and
accurately resolve an accounting issue related to contractual
revenue recognition and (iii) we did not timely evaluate our
accounts receivable for the need of a valuation allowance, each
of which resulted in a material adjustment to our consolidated
financial statements for the fiscal year ended June 30, 2005.
In an effort to remediate the identified material weaknesses we continue
to implement a number of changes to our internal controls over financial
reporting, including, improved training and education for all relevant internal
personnel and the hiring of additional internal resources. If these remedial
initiatives are insufficient to address these material weaknesses, or if
additional material weaknesses or significant deficiencies in our internal
controls are discovered in the future, we may fail to meet our future reporting
obligations on a timely basis, our financial statements may contain material
misstatements, and our common stock may be delisted from the Nasdaq National
Market.
20
We are exposed to potential risks from recent legislation requiring companies to
evaluate their internal control over financial reporting under Section 404 of
the Sarbanes-Oxley Act of 2002.
We are evaluating our internal controls systems in order to allow
management to report on the effectiveness of our internal control over financial
reporting and our registered independent public accounting firm to attest to
this report, as required by Section 404 of the Sarbanes-Oxley Act. We are
performing the system and process evaluation and testing, and implementing any
necessary remediation, required in an effort to comply with the management
report and public accounting firm attestation requirements and continue to incur
additional expenses and devote significant management time towards completing
actions required for management's evaluation. The evaluation and attestation
processes required by Section 404 are new and neither public companies nor
public accounting firms have significant experience in testing or complying with
these requirements. While we have developed and are implementing plans to fully
implement the requirements relating to internal controls and all other aspects
of Section 404 in a timely fashion, we cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions or the impact of
the same on our operations since, like other public companies, we and our
registered independent public accounting firm are undergoing the process for the
first time in a regulatory environment where the standards to assess adequacy of
compliance are under development. We cannot assure you that there may not be
significant deficiencies or material weaknesses that would be required to be
reported as a result of the process.
Risks Related to the Offering and Ownership of our Common Stock
The price of our common stock is likely to be volatile and subject to wide
fluctuations.
The market price of the securities of biotechnology companies has been
especially volatile. Thus, the market price of our common stock is likely to be
subject to wide fluctuations. For the twelve month period ended September 30,
2005, our closing stock price has ranged from a high of $11.74 to a low of
$5.17. If our revenues do not grow or grow more slowly than we anticipate, or,
if operating or capital expenditures exceed our expectations and cannot be
adjusted accordingly, or if some other event adversely affects us, the market
price of our common stock could decline. In addition, if the market for
pharmaceutical and biotechnology stocks or the stock market in general
experiences a loss in investor confidence or otherwise fails, the market price
of our common stock could fall for reasons unrelated to our business, results of
operations and financial condition. The market price of our stock also might
decline in reaction to events that affect other companies in our industry even
if these events do not directly affect us. In the past, companies that have
experienced volatility in the market price of their stock have been the subject
of securities class action litigation. If we were to become the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.
Future sales or the possibility of future sales of substantial amount of our
common stock by the selling stockholders or by our officers and directors may
cause the price of our common stock to decline.
Officers, directors and employees, and certain other stockholders hold
significant numbers of shares of our common stock. Some of those shares are
freely tradable without restriction under the federal securities laws, and those
that are not may be sold in the future pursuant to newly filed effective
registration statements, in compliance with the requirements of Rule 144 under
the Securities Act. Sales in the public market of substantial amounts of our
common stock, whether by our officers, directors, employees or others, or the
perception that such sales could occur, could materially adversely affect
prevailing market prices for our common stock and our ability to raise
additional capital through the sale of equity securities.
Anti-takeover laws, our shareholder rights plan, and provisions of our
certificate of incorporation may discourage, delay, or prevent a merger or
acquisition that our stockholders may consider favorable.
Section 203 of the Delaware General Corporation Law contains provisions
that may delay or prevent a third party from acquiring control of us, even if
doing so might be beneficial to our stockholders by providing them an
opportunity to sell their shares at a premium to the then current market price.
In general, Section 203 prohibits designated types of business combinations,
including mergers, for a period of three years between us and any third party
who owns 15% or more of our common stock. This provision does not apply if:
21
o our board of directors approves the transaction before the third party
acquires 15% of our common stock;
o the third party acquires at least 85% of our common stock at the time
its ownership exceeds the 15% level; or
o our board of directors and two-thirds of the shares of our common stock
not held by the third party vote in favor of the transaction.
We also adopted a shareholder rights plan on November 17, 2004 to deter
hostile or coercive attempts to acquire us. Under the plan, if any person or
group acquires more than 15% of our common stock without approval of the board
of directors under specified circumstances, our other stockholders have the
right to purchase shares of our common stock, or shares of the acquiring
company, at a substantial discount to the public market price. This plan makes
an acquisition much more costly to a potential acquirer, which may deter a
potential acquisition.
Our certificate of incorporation also authorizes us to issue up to
20,000,000 shares of preferred stock in one or more different series with terms
fixed by the board of directors. Stockholder approval is not necessary to issue
preferred stock in this manner. Thus, our board of directors can authorize and
issue shares of preferred stock with voting or conversion rights that could
adversely affect the voting or other rights of holders of our common stock and
thereby reduce its value. These rights could have the effect of making it more
difficult for a person or group to acquire control of us, as well as prevent or
frustrate any attempt by stockholders to change our direction or management.
While our board of directors has no current intention to issue any preferred
stock, the issuance of these shares may deter potential acquirors.
Our existing principal stockholders, executive officers and directors will
continue to have substantial control over our company after this offering, which
may prevent you or other stockholders from influencing significant corporate
decisions.
Our existing principal stockholders, executive officers and directors
beneficially own, in the aggregate, approximately 52% of our outstanding common
stock. As a result, these stockholders will, if they so choose, be able to
substantially control all matters requiring stockholder approval. These matters
include the election of directors and approval of significant corporate
transactions, such as a merger, consolidation, takeover or other business
combination involving us. Our existing principal stockholders, executive
officers and directors may have interests that differ from yours and may vote in
a way with which you disagree and which may be adverse to your interests. This
concentration of ownership could also adversely affect the market price of our
common stock or reduce any premium over market price that an acquirer might
otherwise pay.
Certain events could result in a dilution of holders of our common stock.
As of December 7, 2005, we had 40,760,762 shares of common stock
outstanding, 2,250,000 shares of Series A Convertible Preferred Stock
outstanding which are currently convertible into 4,500,000 shares of common
stock and common stock equivalents, and warrants and stock options, convertible
or exercisable into 11,234,314 shares of our common stock. The exercise and
conversion prices of the common stock equivalents range from $0.74 to $8.87 per
share. We have also reserved for issuance an aggregate of 4,500,000 shares of
common stock for a stock option plan for our employees. Historically, from time
to time, we have awarded our common stock to our officers, in lieu of cash
compensation, although we do not expect to do so in the future. As of December
7, 2005, we have the sale of shares of common stock underlying 4,500,000 options
are registered under the Securities Act on Form S-8. The future resale of these
shares underlying stock options will result in a dilution to your percentage
ownership of our common stock and could adversely affect the market price of our
common stock.
The terms of our Series A Convertible Preferred Stock include
antidilution protection upon the occurrence of sales of our common stock below
certain prices, stock splits, redemptions, mergers and other similar
transactions. If one or more of these events occurs the number of shares of our
common stock that may be acquired upon conversion or exercise would increase. If
converted or exercised, these securities will result in a dilution to your
percentage ownership of our common stock. The resale of many of the shares of
common stock which underlie
22
these options and warrants are registered under this prospectus and the sale of
such shares may adversely affect the market price of our common stock.
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are based on current expectations,
estimates, forecasts and projections about the industry in which we operate,
management's beliefs and assumptions made by management. Such statements
include, in particular, statements about our plans, strategies and prospects
under the headings "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." You can generally identify forward-looking statements by the use of
words such as "believes," "expects," "may," "should," "could," "seeks,"
"approximately," "intends," "plans," "objectives," "goals," "projects,"
"estimates," "anticipates," "continues to," "designed to," "foreseeable future,"
"scheduled" and similar words. Because these statements reflect our current
views concerning future events and are based on current assumptions, they
involve risks, uncertainties and other factors which may lead to actual results
or effects that are materially different from those anticipated or contemplated
in the forward-looking statements. Some, but not all, of the factors that may
cause these differences include, but are not limited to:
o statements about our drug development and commercialization goals and
expectations;
o potential regulatory approvals;
o our plans for and anticipated results of our clinical development
activities;
o the potential advantage of our drug candidates;
o statements about our future capital requirements, the sufficiency of our
capital resources to meet those requirements and the expected
composition of our capital resources;
o other statements that are not historical facts; and
o those items discussed in the "Risk Factors" section of this prospectus.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We caution you not to place
undue reliance on these forward-looking statements. All written and oral
forward-looking statements attributable to us or persons acting on our behalf
are qualified in their entirety by these cautionary statements. We undertake no
obligation to publicly update any forward-looking statement to reflect new
information, events or circumstances, whether anticipated or unanticipated, or
to conform the statement to actual results or changes in our expectations. You
should, however, review the factors, risks and other information we provide in
the reports we file from time to time with the SEC.
USE OF PROCEEDS
The selling stockholders will receive the proceeds from the resale of
the shares of common stock. We will not receive any proceeds from the resale of
the shares of common stock by the selling stockholders. We may receive
consideration upon the exercise of options and we will receive consideration
upon the conversion of warrants which we will use for general corporate
purposes.
The selling stockholders will not pay any of the expenses that are
incurred in connection with the registration of the shares of common stock, but
they will pay all commissions, discounts and any other compensation to any
securities broker-dealers through whom they sell any of the shares of common
stock.
23
MARKET PRICE OF OUR COMMON STOCK
Market Information
Our common stock trades on the Nasdaq National Market under the symbol
"BIVN". The following table sets forth the high and low sales of our common
stock for the periods indicated, as reported by Nasdaq:.
High Low
-------------- -------------
Fiscal year ended June 30, 2004
First Quarter.............................. $5.20 $1.70
Second Quarter............................. 5.40 3.13
Third Quarter.............................. 10.25 3.74
Fourth Quarter............................. 12.00 8.00
Fiscal year ended June 30, 2005
First Quarter.............................. $9.24 $5.90
Second Quarter............................. 11.74 6.86
Third Quarter.............................. 9.18 5.17
Fourth Quarter............................. 7.50 5.30
Fiscal year ended June 30, 2006
First Quarter.............................. $9.18 $6.60
Second Quarter (through December 7, 2005). $8.22 $5.42
The last reported sale price of our common stock on the Nasdaq National
Market on December 7, 2005, was $5.87.
As of December 7, 2005, there were approximately 153 holders of record
of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock, and
our board of directors does not intend to declare or pay any dividends on the
common stock in the foreseeable future. However, we are required to accrue for
and pay a dividend of 5%, subject to certain adjustments, on our cumulative
Series A Convertible Participating Preferred Stock. Our earnings, if any, are
expected to be retained for use in expanding our business. The declaration and
payment in the future of any cash or stock dividends on the common stock will be
at the discretion of the board of directors and will depend upon a variety of
factors, including our ability to service our outstanding indebtedness and to
pay our dividend obligations on securities ranking senior to the common stock,
our future earnings, if any, capital requirements, financial condition and such
other factors as our Board of Directors may consider to be relevant from time to
time.
24
SELLING STOCKHOLDERS
As discussed elsewhere in this prospectus, the selling stockholders are
individuals or entities who or which either hold shares of our common stock or
may acquire the same upon the conversion of preferred shares or upon the
exercise of certain options or warrants and, as discussed under the caption
"Plan of Distribution" below, may include certain of their pledgees, donees,
transferees or other successors-in-interest who receive shares as a gift,
pledge, partnership distribution or other non-sale related transfer. The
following table sets forth, as of the date of this prospectus:
o the name of each selling stockholder;
o the number of shares of common stock beneficially owned by each selling
stockholder;
o the number of shares of common stock that may be sold in this offering;
and
o the number and percentage of shares of common stock that will be
beneficially owned by each selling stockholder following the offering to
which this prospectus relates.
The information with respect to ownership after the offering assumes the
sale of all of the shares offered and no purchases of additional shares. The
selling stockholders may offer all or part of the shares covered by this
prospectus at any time or from time to time.
For purposes of the table below, the number of shares "beneficially
owned" are those beneficially owned as determined under the rules of the SEC.
Such information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as to
which a person has sole or shared voting power or investment power and any
shares for which the person has the right to acquire such power within 60 days
through the exercise of any option, warrant or right, through conversion of any
security or pursuant to the automatic termination of a power of attorney or
revocation of a trust, discretionary account or similar arrangement. Percentages
in the table below are based on 40,760,762 shares of our common stock
outstanding as of December 7, 2005.
Number of
Shares
Shares which may Shares
Owned Prior be Sold Owned After
to the Offering in this the Offering
Name Number Percent Offering Number Percent
---- ------ ------- -------- ------ -------
Perseus-Soros BioPharmaceutical
Fund, LP (1) 7,950,053 16.48% 7,950,053 -- --
Special Situations Private
Equity Fund, L.P. (3) 250,000 * 250,000 -- --
SDS Merchant Fund, LP (4) 144,999 * 48,333 96,666 *
SDS Merchant Fund, LP (5) 354,999 * 118,333 236,666 *
SDS Merchant Fund, LP (6) 380,001 * 166,667 213,334 *
Orion Biomedical Offshore Fund,
LP (7) 133,875 * 44,625 89,250 *
Orion Biomedical Fund, LP (8) 616,125 1.51% 205,375 410,750 1.00%
Beaver Ltd. (9) 75,000 * 25,000 50,000 *
CKH Invest Aps. (10) 50,001 * 16,667 33,334 *
Merlin Nexus I LP (11) 673,617 1.65% 406,949 266,668 *
Alexandra Global Master Fund,
ltd.(12) 666 * 666 -- --
DWS Investment GmbH (13) 1,360,600 3.34% 493,934 866,666 2.13%
Michael Sistenich (14) 125,001 * 41,667 83,334 *
Global Biotechnology Fund (15) 209,369 * 76,037 133,332 *
Oklahoma Medical Research
Foundation (16) 44,166 * 44,166 -- --
Robert A. Floyd (16) 66,666 * 66,666 -- --
Raymond A. Schinazi (16) 66,666 * 66,666 -- --
Christopher B. Wood (17) 4,121,987 9.67% 2,239,905 1,882,082 4.41%
Julie Wood (17) 318,750 * 318,750 -- --
Stuart Smith (18) 700,000 1.72% 700,000 -- --
Thomas Nelson (19) 261,787 * 178,351 83,436 *
Kevin Leech (20) 1,813,912 4.45% 413,912 1,400,000 3.43%
Bioaccelerate, Inc. (21) 1,162,100 2.85% 434,828 727,272 1.78%
Sterling Securities Ltd. (21) 74,045 * 74,045 -- --
25
Number of
Shares
Shares which may Shares
Owned Prior be Sold Owned After
to the Offering in this the Offering
Name Number Percent Offering Number Percent
---- ------ ------- -------- ------ -------
Carpe DM, Inc. (21) 59,058 * 59,058 -- --
Michelle Tidball (21) 254,114 * 254,114 -- --
Weil Consulting Corporation (21) 75,000 * 75,000 -- --
Kingsley Securities Ltd. (21) 102,679 * 102,679 -- --
Fontenelle LLC (21) 50,000 * 50,000 -- --
George Margetts (22) 100,000 * 100,000 -- --
Nagy Habib (23) 41,881 * 41,881 -- --
NAB Holdings Ltd. (21) (24) 451,913 1.11% 451,913 -- --
SCO Capital Partners LLC (25), (27) 7,009,946 16.44% 7,009,946 -- --
SCO Financial Group LLC (25), (27) 100,000 * 100,000 -- --
SCO Securities LLC (25), (27) 260,290 * 260,290
Daniel DiPietro (29) 50,000 * 50,000 -- --
Jeremy Kaplan 10,000 * 10,000 -- --
Joshua Golumb 10,000 * 10,000 -- --
The Sophie C. Rouhandeh Trust(25) 150,000 * 150,000 -- --
The Chloe H. Rouhandeh Trust (25) 150,000 * 150,000 -- --
Jeffrey B. Davis (26), (27), (29) 749,243 1.83% 250,000 499,243 1.22%
Edward W. Kelly (27), (28) 356,013 * 200,000 156,013 *
RRD International, Inc. (30) 130,277 * 130,277 -- --
RLB Capital, Inc. (31) 100,000 * 100,000 -- --
Stamford Capital (32) 54,722 * 54,722 -- --
Palladin Opportunity Fund LLC 13,632 * 13,632 -- --
SDS Capital Group SPC, Ltd. (33) 159,802 * 159,802 -- --
Baystar Capital II, L.P. (34) 60,000 * 60,000 -- --
North Sound Legacy Fund, LLC (35) 1,440 * 1,440 -- --
North Sound Legacy Institutional
Fund, LLC (36) 15,840 * 15,840 -- --
North Sound Legacy International
Fund, LLC (37) 30,720 * 30,720 -- --
Vertical Ventures, LLC (38) 115,200 * 115,200 -- --
Iroquois Capital LP (39) 76,800 * 76,800 -- --
Alpha Capital AG (40) 96,000 * 96,000 -- --
Millenium Partners LP (41) 120,000 * 120,000 -- --
Jennison Health Sciences Fund (42) 288,000 * 288,000 -- --
BioPharmaceutical Portfolio (43) 30,240 * 30,240 -- --
MP BioPharmaceutical Partners,
L.P. (44) 16,680 * 16,680 -- --
MP BioPharmaceutical Fund Ltd. (45) 68,880 * 68,880 -- --
MP BioPharm Market-Neutral, L.P.
(46) 4,200 * 4,200 -- --
Silveroak Invenstments, Inc. (47) 48,000 * 48,000 -- --
SF Capital Partners Ltd. (48) 288,000 288,000 -- --
Perceptive Lifesciences Master
Fund, Ltd. (49) 216,000 * 216,000 -- --
Cranshire Capital, L.P. (50) 48,000 * 48,000 -- --
Quogue Capital LLC (51) 14,000 * 14,000 -- --
Meditor Master Curra Fund Limited
(52) 192,000 * 192,000 -- --
Atlas Equity I, Ltd. (53) 103,333 * 103,333 -- --
Steve Oliviera (54) 24,000 * 24,000 -- --
SRG Capital LLC (55) 24,000 * 24,000 -- --
StoneStreet LP (56) 60,000 * 60,000 -- --
DKR Soundshore Oasis Holding
Company, Ltd. (57) 48,000 * 48,000 -- --
Total 34,216,788 26,988,742 7,228,046
* Represents less than 1% of our outstanding shares of common stock.
(1) Includes 2,250,000 shares of Series A Preferred Stock currently
convertible into 4,500,000 shares of common stock and a warrant to
purchase 3,000,000 shares of common stock exercisable at $2.00 per
share for five years from May 8, 2002. Also includes 375,044 common
shares and a warrant to purchase 75,009 shares of common stock
exercisable at $7.50 for five years from May 13, 2004. Perseus-Soros
Partners, LLC is the general partner of the Perseus-Soros
BioPharmaceutical Fund, LP. Perseus BioTech Fund Partners, LLC and SFM
Participation, L.P. are the managing members of Perseus-Soros
Partners, LLC. Perseuspur, LLC is the managing member of Perseus
BioTech Fund Partners, LLC. Frank Pearl is the sole member of
Perseuspur, LLC and in such capacity may be deemed a beneficial owner
of securities held for the account of the Perseus-Soros
BioPharmaceutical Fund, LP. SFM AH, LLC is the
26
general partner of SFM Participation, L.P. The sole managing member of
SFM AH, LLC is Soros Fund Management LLC. George Soros is the Chairman
of Soros Fund Management LLC and in such capacity may be deemed a
beneficial owner of securities held for the account of the
Perseus-Soros BioPharmaceutical Fund, LP. The address of Perseus-Soros
BioPharmaceutical Fund, LP is 888 Seventh Avenue, 30th Floor, New
York, New York 10106.
(2) Intentionally omitted.
(3) Includes a Warrant to purchase 250,000 shares of common stock
exercisable at $2.00 per share for five years from May 8, 2002.
(4) Includes 48,333 shares of Series A Preferred Stock currently
convertible into 96,666 shares of common stock and a warrant to
purchase 48,333 shares of common stock exercisable at $2.00 per share
for five years from May 8, 2002, which were sold to SDS Merchant Fund,
LP by XMark Fund, LP. All securities held registered to SDS Merchant
Fund, LP are beneficially owned by SDS Capital Group SPC, Ltd.
(5) Includes 118,333 shares of Series A Preferred Stock currently
convertible into 236,666 shares of common stock and a warrant to
purchase 118,333 shares of common stock exercisable at $3.00 per share
for five years from May 8, 2002, which were sold to SDS Merchant Fund,
LP by XMark Fund, Ltd. All securities held registered to SDS Merchant
Fund, LP are beneficially owned by SDS Capital Group SPC, Ltd.
(6) Includes 213,334 shares of common stock and a warrant to purchase
166,667 shares of common stock exercisable at $2.00 per share for five
years from May 8, 2002. All securities held registered to SDS Merchant
Fund, LP are beneficially owned by SDS Capital Group SPC, Ltd.
(7) Includes 133,875 shares of common stock resulting from converting
their Series A Preferred Stock and exercising a warrant on May 25,
2004.
(8) Includes 616,125 shares of common stock resulting from converting
their Series A Preferred Stock and exercising a warrant on May 25,
2004.
(9) Includes 75,000 shares of common stock resulting from converting their
Series A Preferred Stock and exercising a warrant on May 7, 2004.
(10) Includes 33,334 shares of common stock and a warrant to purchase
16,667 shares of common stock exercisable at $2.00 per share for five
years from May 14, 2002.
(11) Includes 108,334 shares of Series A Preferred Stock currently
convertible into 216,668 shares of common stock (which Merlin
converted on December 8, 2004); 444,680 shares of common stock and a
warrant to purchase 12,269 shares of common stock at $7.50 per share
for five years from March 22, 2004. Based upon information contained
in its report on Schedule 13G filed with the Commission on June 28,
2002, Merlin Nexus I (formerly known as, Merlin BioMed Private Equity
Fund, L.P.) reported that it shares the power to direct the voting and
disposition of its shares of common stock with Merlin BioMed Private
Equity, LLC, its general partner and Dominique Semon, who is the sole
managing member of the general partner.
(12) Pursuant to a SC 13G/A filed by Alexandria on December 31, 2004, as of
December 31, 2004 they beneficially owned 666 common shares.
(13) Includes 1,350,500 shares of common stock resulting from converting
their Series A Preferred Stock, the purchase of an additional 50,501
shares of common stock in the March 2004 financing and exercising a
warrant on March 17, 2004. Also a warrant to purchase 10,100 shares of
common stock exercisable at $7.50 for five years from May 13, 2004.
27
(14) Includes 125,001 shares of common stock.
(15) Includes 209,369 shares of common stock.
(16) Under the terms of an amendment to a license agreement with Oklahoma
Medical Research Foundation, we issued 200,000 shares of common stock,
(all of which have been sold) and a five-year warrant to purchase an
additional 200,000 shares of common stock. Such warrant to purchase
200,000 shares of common stock is exercisable at $2.33 per share for
five years from May 14, 2002. On February 17, 2004, Oklahoma Medical
Research Foundation did a non-sale transfer of its warrant to purchase
66,666 shares of common stock to Dr. Robert A. Floyd and its warrant
to purchase 66,666 shares of common stock to Dr. Raymond A. Schinazi.
On April 12, 2004, Oklahoma Medical Research Foundation converted its
warrant into common shares and has 44,166 of such shares remaining.
(17) Dr. Wood is Chairman and Chief Executive Officer of the Company.
Excludes 318,750 shares of common stock owned by Julie Wood, Dr.
Wood's spouse, as to which Dr. Wood disclaims any beneficial interest.
(18) Includes options to acquire 225,000 shares of the common stock which
are exercisable at $1.25 per share for five years from April 30, 2001.
(19) Includes 261,787 shares of common stock.
(20) These shares are owned of record by Phoenix Ventures Limited, a
Channel Islands (Jersey) corporation, which, to our knowledge, is
wholly-owned by Kevin Leech.
(21) Bioaccelerate, Inc. is a BVI corporation, owned of record by several
private investors. On October 8, 2003, certain options originally
issued to Bioaccelerate, Inc. were transferred as follows:
(i) NAB Holdings Ltd. received options to purchase 500,000 shares
of common stock, 350,000 of which were transferred to Michelle
Tidball on December 9, 2003; on February 20, 2004, they did a
cashless exercise of their remaining option to purchase
150,000 shares of common stock and received 123,666 shares of
common stock ;
(ii) Sterling Securities Ltd. received options to purchase 100,000
shares of common stock;
(iii) Carpe DM, Inc. received options to purchase 80,000 shares of
common stock;
(iv) Michelle Tidball received options to purchase 100,000 shares
of common stock;
(v) Kingsley Securities Ltd. received options to purchase 124,544
shares of common stock and on February 20, 2004, they did a
cashless exercise of this option and received 102,679 shares
of common stock; and
(vi) Fontenelle LLC received options to purchase 50,000 shares of
common stock, which it exercised in November 2003 for 50,000
shares of common stock.
Further, on November 25, 2003, the following recipients of such options
executed a cashless exercise of such options and received the following
shares of the Company's common stock:
(i) Sterling Securities Ltd. received 74,045 shares of common
stock;
(ii) Carpe DM, Inc. received 59,058 shares of common stock; and
(iii) Michelle Tidball received 73,811 shares of common stock. On
December 16, 2003, Ms. Tidball executed a cashless exercise of
350,000 options transferred to her by NAB Holdings
28
Inc. and received 255,303 shares of the Company's common
stock, which includes 75,000 shares issued to Weil Consulting
Corporation.
Barbara Platts, in her capacity as Managing Director of Bioaccelerate,
Inc., has investment power and voting power with respect to these
shares, but disclaims any beneficial ownership thereof.
(22) Includes an option to purchase 100,000 shares of common stock
exercisable at $1.25 per share for five years from April 30, 2001.
(23) Includes 41,881 common shares.
(24) Includes an option to purchase 450,000 shares of common stock
exercisable at $1.25 per share for five years from April 30, 2001. On
December 16, 2003, NAB Holdings Ltd. exercised these options and
received 328,247 shares of common stock pursuant to a cashless
exercise.
(25) Includes a warrant to purchase 1,200,000 shares of common stock
exercisable at $1.25 per share for five years from November 16, 2001
issued to SCO Capital, LLC; a warrant to purchase 688,333 shares of
common stock exercisable at $1.50 per share for five years from May 8,
2002 issued to SCO Capital, LLC; a warrant to purchase 100,000 shares
of common stock exercisable at $1.25 per share for five years from
November 16, 2001 issued to SCO Securities, LLC; a warrant to purchase
150,000 shares of common stock exercisable at $1.25 per share for five
years from November 16, 2001 held by the Sophie C. Rouhandeh Trust;
and a warrant to purchase 150,000 shares of common stock at $1.25 per
share for five years from November 16, 2001 held by the Chloe H.
Rouhandeh Trust. Steven H. Rouhandeh, in his capacity as President of
SCO Capital Partners, LLC and trustee of the trusts, has investment
power and voting power with respect to these shares, but disclaims any
beneficial ownership thereof. Excludes a warrant to purchase 70,000
shares of common stock exercisable at $1.50 per share for five years
from May 8, 2002 which were originally held by SCO Financial Group,
LLC, but transferred to (i) Daniel DiPietro (50,000), (ii) Jeremy
Kaplan (10,000), and (iii) Joshua Golumb (10,000). SCO Financial
Group, LLC served as a financial advisor to the Company through May
2004 and SCO Capital Partners, LLC extended a $1 million secured
credit facility to the Company in November 2001. SCO Securities, LLC,
a related entity, served as placement agent to the Company in
connection with the Company's May 2002 and March and May 2004
financings. As placement agent in connection with the March and May
2004 financing, SCO Securities, LLC received a warrant to purchase
204,452 shares of common stock exercisable at $6.25 per share for five
years from March 22, 2004 and a warrant to purchase 55,838 shares of
common stock exercisable at $6.25 per share for five years from May
13, 2004.
(26) Includes a warrant to purchase 250,000 shares of common stock
exercisable at $1.50 per share for five years from May 8, 2002. Mr.
Davis is the President of SCO Financial Group LLC, an affiliate of SCO
Capital Partners LLC. Mr. Davis disclaims beneficial ownership of all
shares of common stock deemed beneficially owned by SCO Capital
Partners LLC.
(27) Indicates the selling stockholder was a former stockholder of
Pathagon.
(28) Mr. Kelly has executed a consulting agreement with us pursuant to
which we issued to him 200,000 shares of common stock which vested
over an eighteen month period.
(29) Indicates the selling stockholder is a current employee of SCO
Financial Group LLC.
(30) Includes 130,277 shares of common stock resulting from the cashless
exercise of a warrant to purchase 175,000 shares of common stock on
July 21, 2004.
(31) Includes a warrant to purchase 60,000 shares of common stock
exercisable at $1.25 per share for three years from March 8, 2004 and
40,000 common shares issued pursuant to an exercise of 40,000
warrants.
29
(32) Includes a warrant to purchase 40,000 shares of common stock
exercisable at $1.80 per share at anytime from March 4, 2004 through
February 23, 2007 and 14,722 common shares issued pursuant to a
cashless exercise of 20,000 warrants.
(33) Includes 133,168 shares of common stock and warrant to purchase 26,634
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(34) Includes 50,000 shares of common stock and warrant to purchase 10,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(35) Includes 1,200 shares of common stock and warrant to purchase 240
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(36) Includes 13,200 shares of common stock and warrant to purchase 2,640
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(37) Includes 25,600 shares of common stock and warrant to purchase 5,120
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(38) Includes 96,000 shares of common stock and warrant to purchase 19,200
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(39) Includes 64,000 shares of common stock and warrant to purchase 12,800
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(40) Includes 80,000 shares of common stock and warrant to purchase 16,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(41) Includes 100,000 shares of common stock and warrant to purchase 20,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(42) Includes 240,000 shares of common stock and warrant to purchase 48,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(43) Includes 25,200 shares of common stock and warrant to purchase 5,040
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(44) Includes 13,900 shares of common stock and warrant to purchase 2,780
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(45) Includes 57,400 shares of common stock and warrant to purchase 11,480
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(46) Includes 3,500 shares of common stock and warrant to purchase 700
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(47) Includes 40,000 shares of common stock and warrant to purchase 8,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(48) Includes 240,000 shares of common stock and warrant to purchase 48,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(49) Includes 216,000 shares of common stock.
30
(50) Includes 40,000 shares of common stock and warrant to purchase 8,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(51) Includes a warrant to purchase 14,000 shares of common stock
exercisable at $7.50 per share for five years from March 22, 2004.
(52) Includes 160,000 shares of common stock and warrant to purchase 32,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(53) Includes 103,333 shares of common stock.
(54) Includes 20,000 shares of common stock and warrant to purchase 4,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(55) Includes 20,000 shares of common stock and warrant to purchase 4,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(56) Includes 50,000 shares of common stock and warrant to purchase 10,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
(57) Includes 40,000 shares of common stock and warrant to purchase 8,000
shares of common stock exercisable at $7.50 per share for five years
from March 22, 2004.
31
DESCRIPTION OF OUR CAPITAL STOCK
The following summarizes the material provisions of our certificate of
incorporation and by-laws that relate to our capital stock. Copies of those
documents are incorporated by reference as exhibits to the registration
statement that includes this prospectus. See "Where You Can Find More
Information."
Description of Common Stock
Number of Authorized and Outstanding Shares. Our Certificate of
Incorporation authorizes the issuance of 70,000,000 shares of common stock,
$.001 par value per share, of which 40,760,762 shares were outstanding on
December 7, 2005. All of the outstanding shares of common stock are fully paid
and non-assessable.
Voting Rights. Holders of shares of common stock are entitled to one
vote for each share on all matters to be voted on by the stockholders. Holders
of common stock have no cumulative voting rights. Accordingly, the holders of a
simple majority of the outstanding common stock and Series A convertible
preferred stock, voting together as a class at a stockholders meeting at which a
quorum is present, can elect all of the directors nominated for election at the
meeting.
Other. Holders of common stock have no preemptive rights to purchase our
common stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the common stock.
Transfer Agent. Shares of common stock are registered at the transfer
agent and are transferable at such office by the registered holder (or duly
authorized attorney) upon surrender of the common stock certificate, properly
endorsed. No transfer shall be registered unless we are satisfied that such
transfer will not result in a violation of any applicable federal or state
securities laws. The transfer agent for our common stock is American Stock
Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038, Attn: Susan
Silber.
Description of Preferred Stock
Number of Authorized and Outstanding Shares. Our Certificate of
Incorporation authorizes the issuance of up to 20,000,000 shares of preferred
stock, par value $.001 per share, in one or more series with such limitations
and restrictions as may be determined in the sole discretion of our board of
directors, with no further authorization by stockholders required for the
creation and issuance thereof. We have designated 5,920,000 shares of our
preferred stock as Series A convertible preferred stock, of which 2,250,000
shares were issued and outstanding as of December 7, 2005.
Voting Rights. The holders of the Series A convertible preferred stock
vote as a single class with the common stock, on an as-converted basis, on all
matters upon which the holders of the common stock are entitled to vote.
Conversion. Each outstanding share of Series A convertible preferred
stock may currently be converted into two shares of common stock. The shares of
Series A convertible preferred stock shall be automatically convertible into
shares of common stock if the market price of the common stock after one year
from the date of issuance is $10.00 or more for 30 consecutive trading days and
the trading volume is at least 150,000 shares per trading day during such 30-day
period.
Liquidation Preference and Dividends. Holders of Series A convertible
preferred stock have a liquidation preference over holders of common stock of
$3.00 per share. Holders of the Series A convertible preferred stock are
entitled to an annual 5% dividend which may be paid in cash or additional shares
of common stock in our sole discretion.
Our charter also authorizes our board of directors to increase the
number of shares of preferred stock we may issue without approval of common
stockholders. Preferred stock may be issued in one or more series, the terms of
which may be determined without further action by common stockholders. These
terms may include preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
32
conditions of redemption. The issuance of any preferred stock could materially
adversely affect the rights of holders of our common stock, and therefore could
reduce its value. In addition, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell
assets to, a third party. The power of the board of directors to issue preferred
stock could make it more difficult, delay, discourage, prevent or make it more
costly to acquire or effect a change in control, thereby preserving the current
stockholders' control.
Stockholder Rights Plan
Under our stockholder rights plan, if a person or group acquires 15% or
more of our common stock, all rightsholders, except the acquiror, will be
entitled to acquire at the then exercise price of a right that number of shares
of our common stock which at the time will have a market value of two times the
exercise price of the right. In addition, under certain circumstances, all
rightholders, other than the acquiror, will be entitled to receive at the then
exercise price of a right that number of shares of common stock of the acquiring
company which at the time will have a market value of two times the exercise
price of the right. The initial exercise price of a right is $70. Such rights
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock and may have the effect of delaying
or preventing a change in control. The issuance of preferred stock also could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of our common stock.
Warrants
As of December 7, 2005, there were outstanding warrants to purchase an
aggregate of 7,166,147 shares of our common stock, exercisable at prices ranging
from $1.25 to $8.25 per share. The weighted average exercise price of the
warrants is $2.32.
Stock Options
As of December 7, 2005, there were outstanding options to purchase an
aggregate of 4,078,167 shares of our common stock, exercisable at prices ranging
from $0.735 to $8.87 per share, of which, options to purchase 2,601,356 shares
were exercisable. The weighted average exercise price of the options is $3.26.
Delaware Law and Certain By-Law Provisions
Certain provisions of our by-laws are intended to strengthen our board
of directors' position in the event of a hostile takeover attempt. These by-law
provisions have the following effects:
o they provide that only business brought before the annual
meeting by our board of directors or by a stockholder who
complies with the procedures set forth in the by-laws may be
transacted at an annual meeting of stockholders; and
o they establish a procedure for our board of directors to fix the
record date whenever stockholder action by written consent is
undertaken.
Furthermore, our Company is subject to the provisions of Section 203 of
the Delaware General Corporation Law, an anti-takeover law. In general, the
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior, did own, 15% or
more of the corporation's voting stock.
33
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data. You
should read the summary consolidated financial data together with our
consolidated financial statements and the related notes appearing at the end of
this prospectus, and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and other financial information
included in this prospectus.
The selected consolidated balance sheets data as of June 30, 2005 and
2004 and the selected consolidated statements of operations data and statements
of cash flows data for the years ended, June 30, 2005 and 2004 have been derived
from our audited consolidated financial statements that are included elsewhere
in this prospectus. The selected consolidated balance sheets data as of June 30,
2003, 2002 and 2001 and the selected consolidated statements of operations data
and statements of cash flows data for the years ended June 30, 2003, 2002 and
2001 have been derived from our audited consolidated financial statements not
included in this prospectus. See Note 10 of the Notes to Consolidated Financial
Statements for the year ended June 30, 2005, included in the prospectus, for
information as to why certain financial statements were restated. The selected
consolidated statement of operations data for the three months ended September
30, 2005 and 2004 and the selected consolidated balance sheet data as of
September 30, 2005 have been derived from our unaudited financial statements
included elsewhere in this prospectus. The unaudited consolidated financial
statements include, in the opinion of management, all adjustments that
management considers necessary for the fair presentation of the financial
information set forth in those statements.
Three months ended
Year Ended June 30, September 30,
--------------------------------------------------------------------- ------------------------
Consolidated Statements of
Operations Data 2005 2004 2003 2002 2001 2005 2004
--------------- ---- ---- ---- ---- ---- ---- ----
As Restated As Restated As Restated As Restated
Revenues $4,651,174 $3,102,214 $504,857 $802,965 $245,455 670,218 1,085,328
Cost of sales 921,262 - - - - 328,291 -
Operating expenses
Research and development 10,894,925 4,882,574 1,689,278 1,912,258 1,565,908 2,430,918 2,138,897
General and
administrative 10,181,711 9,082,420 4,567,413 2,127,664 550,215 2,887,462 1,756,713
Depreciation and
amortization 1,438,517 1,348,064 1,344,969 579,342 22,809 224,283 339,706
Provision for bad debts 869,220 - - - - - -
Loss on impairment 5,276,162 - - - - - -
---------- ---------- --------- --------- --------- --------- ---------
Total operating expenses 29,581,797 15,313,058 7,601,660 4,619,264 2,138,932 5,870,954 4,235,316
---------- ---------- --------- --------- --------- --------- ---------
Loss from operations (24,930,623) (12,210,844) (7,096,803) (3,816,299) (1,893,477) (5,200,736) (3,149,988)
Other income (expense) 667,838 99,763 (186,426) (2,172,682) (228,787) 396,144 55,437
------- ------ --------- ----------- --------- ------- ------
Loss from continuing
operations (24,262,785) (12,111,081) (7,283,229) (5,988,981) (2,122,264) (4,804,592) (3,094,551)
Income tax benefit - 1,459,814 2,117,103 1,168,145 - - -
---------- ---------- --------- --------- --------- --------- ---------
Net loss (24,262,785) (10,651,267) (5,166,126) (4,820,836) (2,122,264) (4,804,592) (3,094,551)
Cumulative preferred stock
dividend (404,079) (856,776) (877,818) (9,482,667) - (85,068) (126,341)
---------- ---------- --------- --------- --------- --------- ---------
Net loss available to
shareholders $(24,666,864) $(11,508,043) $(6,043,944) $(14,303,503) $(2,122,264) (4,889,660) (3,220,892)
============= ============= ============ ============= ============ =========== ===========
Basic and diluted shares
outstanding 34,042,391 20,257,482 16,920,939 12,184,152 8,121,255 40,572,626 28,516,450
Basic and diluted net loss
available to shareholders
per share $ (0.72) $ (0.57) $ (0.36) $ (1.17) $ (0.26) $ (0.12) $ (0.11)
34
As of
As of June 30, September 30,
---------------------------------------------------------------- -------------
Consolidated Balance
Sheets Data 2005 2004 2003 2002 2001 2005
----------- ---- ---- ---- ---- ---- ----
As Restated As Restated As Restated
Cash & cash equivalents $31,697,533 $19,165,675 $8,219,686 $12,882,521 $ - 12,498,760
Short-term securities 32,746,948 - - - - 48,209,088
Intangibles, net 8,252,936 14,563,660 15,779,399 16,921,792 15,698 8,155,836
Total assets 80,790,135 42,170,844 26,173,132 32,380,548 762,885 77,047,738
Total current
liabilities 6,738,722 3,460,419 2,264,896 2,395,596 1,966,538 7,578,329
Total debt - - - - - -
Total shareholder's
equity (deficit) 66,613,815 30,800,827 21,323,737 25,554,550 (2,482,516) 62,156,464
Three Months Ended
Year Ended June 30, September 30,
-------------------------------------------------------------- -------------------------
Consolidated
Statements of Cash
Flows Data 2005 2004 2003 2002 2001 2005 2004
---------- ---- ---- ---- ---- ---- ---- ----
As Restated As Restated As Restated
Net Cash (used in)
Operating Activities (13,417,438) (4,641,193) (4,411,581) (2,675,113) (156,835) (3,741,032) (1,221,882)
Net Cash (used in)
Investing Activities (33,384,403) (130,917) (541,254) (455,500) (1,760) (15,313,804) (44,369)
Net Cash provided by
(used in) Financing
Activities 59,296,122 15,730,847 - 16,013,134 127,241 (84,144) 53,859
35
SUPPLEMENTARY FINANCIAL INFORMATION
Certain quarterly financial information is set forth below. See Note 10
of the Notes to Consolidated Financial Statements for the year ended June 30,
2005, included in the prospectus, for information as to why certain interim
periods were restated.
Year ended June 30, 2006
------------------------
Quarter Ended
9/30/2005
---------
Revenues 670,218
Gross Profit 341,927
Net loss (4,804,592)
Net loss available to $(4,889,660)
shareholders
Basic and diluted net loss $(0.12)
available to shareholders per
share
Year Ended June 30, 2005
------------------------
As Restated As Restated
9/30/2004 12/31/2004 3/31/2005 6/30/2005
--------- ---------- --------- ---------
Revenues $1,085,328 $1,175,923 $1,398,969 $990,954
Gross Profit 1,085,328 1,045,567 1,299,908 299,109
Net loss (3,094,551) (4,004,831) (3,072,410) (14,090,992)
Net loss available to
shareholders $(3,220,892) $(4,115,206) $(3,155,629) $(14,175,136)
=========== =========== =========== =============
Basic and diluted net loss
available to shareholders per
share $ (0.11) $ (0.14) $ (0.08) $ (0.35)
Year Ended June 30, 2004
------------------------
As Restated As Restated As Restated As Restated
9/30/2003 12/31/2003 3/31/2004 6/30/2004
--------- ---------- --------- ---------
Revenues $829,041 $82,495 $846,494 $1,344,184
Gross Profit 829,041 82,495 846,494 1,344,184
Net loss (2,404,044) (1,678,163) (3,692,543) (2,876,517)
Net loss available to
shareholders $(2,627,754) $(1,866,720) $(3,868,247) $(3,145,322)
=========== =========== =========== ============
Basic and diluted net loss
available to shareholders per
share $ (0.15) $ (0.10) $ (0.19) $ (0.13)
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. In December 2004, the Food and Drug Administration, or FDA,
approved our lead cancer product, clofarabine, for the treatment of pediatric
acute lymphoblastic leukemia, or ALL, in patients who are relapsed or refractory
to at least two prior regimens of treatment. 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 E.U. Genzyme Corporation, our co-development partner, currently
holds marketing rights in the U.S. and Canada for clofarabine for certain cancer
indications and currently controls U.S. development of clofarabine in these
indications. Genzyme is marketing clofarabine under the brand name Clolar(R) in
the U.S. In Europe, we have filed for approval of clofarabine in pediatric ALL
with the European Medicines Evaluation Agency, or EMeA. If approved, we
anticipate commencing sales in Europe during the first half of calendar 2006
through a dedicated European sales force. We are selling our second product,
Modrenal(R), in the U.K., through our sales force of eight sales specialists.
Modrenal(R) is approved in the U.K. for the treatment of post-menopausal
advanced breast cancer following relapse to initial hormone therapy.
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. Further, we intend to penetrate all of the other markets within the E.U.
upon establishing traction in the E.U's major markets.
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(R) described above. Currently, we are considering all
options available to us for the marketing and distribution of clofarabine in our
primary markets, including, without limitation, doing so directly and internally
with our own sales force, doing so through one or more distributors or
wholesalers or disposing of the marketing and distribution rights to a third
party.
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 early stage of our operations. 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 in Europe and successfully develop certain of our other
product candidates.
We anticipate that revenues derived from our two lead drugs, clofarabine
and Modrenal(R) will permit us to further develop the other products currently
in our product pipeline. In addition to clofarabine and Modrenal(R), we are
performing initial development work on Virostat for the treatment of Hepatitis C
and Velostan. The work to date on these compounds has been limited because of
the need to concentrate on clofarabine and Modrenal(R) but management believe
these compounds have potential value. With Virostat, the Company has commenced a
phase II clinical trial in patients with hepatitis C viral infection and with
Velostan the Company has been developing a process for the separation of optical
isomers of the compound and we are conducting additional pre-clinical testing.
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, or 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 U.S. and Canada, to Dechra. We received
$1.25 million in cash,
37
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. The Company also owns rights to
OLIGON(R) technology and we have had discussions with potential product
licensing 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.
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 continue to establish and maintain relationships with manufacturers for our
products;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
We may not be successful in addressing these or any risks associated with
our business and/or products. 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 for the three months ended September 30, 2005
The Company recorded revenues for the three months ended September 30,
2005 and 2004 of approximately $670,000 and $1,085,000, respectively,
representing a decrease of approximately $415,000. This was primarily due to a
decrease in research and development contract revenue as the Company did not
record approximately $685,000 of revenues relating to the reimbursement from our
co-development partner for certain of our ongoing research costs in the
development of clofarabine outside the United States because it determined that
the criteria for recognizing such contract revenues had not been met. When the
Company has determined that the criteria relating to revenue recognition has
been met, the Company will record the revenue. This decrease is offset by an
increase in product sales of Modrenal(R). The increase in product sales of
Modrenal(R) is due to the fact that we received marketing authorization from the
Medicines and Healthcare Products Regulatory Agency for Modrenal(R) in September
of 2004 and we are now marketing, Modrenal(R) in the U.K., through our own sales
specialists, for the treatment of post-menopausal advanced breast cancer
following relapse to initial hormone therapy.
The cost of products sold for the three months ended September 30, 2005
was approximately $328,000. The cost of products sold reflects the direct costs
associated with our sales of Modrenal(R).
Research and development costs for the three months ended September 30,
2005 and 2004 were approximately $2,431,000 and $2,139,000, respectively,
representing an increase of approximately $292,000.
38
Our research and development costs include costs associated with the six
projects shown in the table below, four of which the Company currently devotes
time and resources:
Three months ended September 30,
Product 2005 2004 Change from prior year
-------- ---- ---- ----------------------
(in thousands)
Clofarabine $2,138 $1,880 $258
Modrenal $236 $251 $(15)
Virostat $57 $0 $57
Velostan $0 $8 $(8)
OLIGON - - -
Gene Therapy - - -
Clofarabine research and development costs for the three months ended
September 30, 2005 and 2004 were approximately $2,138,000 and $1,880,000,
respectively, representing an increase of approximately $258,000. The increase
primarily reflects costs which are associated with our increased development
activities and clinical trials of clofarabine being conducted in Europe.
Modrenal(R) research and development costs for the three months ended
September 30, 2005 and 2004 were approximately $236,000 and $251,000,
respectively, representing a decrease of $15,000. These costs did not increase
in the three-month period ended September 30, 2005 because the Company had not
yet expanded its clinical development program for this compound as it continued
to review the development strategy with its regulatory advisors.
Virostat research and development costs for the three months ended
September 30, 2005 and 2004 were approximately $57,000 and $0, respectively,
representing an increase of $57,000. The increase primarily reflects the costs
associated with the ongoing, multi-center investigator sponsored Phase II
clinical trial being conducted in Egypt and Southern Europe.
Velostan research and development costs for the three months ended
September, 30 2005 and 2004 were approximately $0 and $8,000, respectively,
representing a decrease of $8,000. These costs did not increase because the
Company is actively working on the manufacturing process with its regulatory
advisors to develop a raceamic form of the compound for use in the Company's
clinical development program. No assurance can be given the Company will be able
to create the L-form velostan required for the clinical development program or,
if it can, the timing of such development.
There were no research and development costs associated with Gene
Therapy or OLIGON for the three months ended September 30, 2005 and 2004 due to
the Company's focus on clofarabine during this period. We anticipate that
revenues derived from our two lead drugs, clofarabine and Modrenal(R) will
permit us to further develop these products.
The clinical trials and development strategy for the clofarabine and
Modrenal(R) 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 $16,453,000; (ii) Modrenal(R) research and
development costs have been approximately $6,605,000; (iii) Velostan research
and development costs have been approximately $380,000; (iv) Virostat research
and development costs have been approximately $246,000; (v) OLIGON research and
development costs have been approximately $25,000; and (vi) Gene Therapy
research and development costs have been approximately $451,000.
39
Selling, general and administrative expenses for the three months ended
September 30, 2005 and 2004 were approximately $2,887,000 and $1,757,000,
respectively, representing an increase of $1,130,000. Of this amount $882,000 is
related to an increase in payroll and other compensation expenses due to an
increase in headcount in both the New York and Edinburgh offices and stock-based
compensation due to the Company adopting SFAS 123(R), on July 1, 2005, an
increase in sales and marketing costs of $250,000 related to the Company's
deployment of a sales and marketing force in the UK in early 2005, and an
increase in rent expense of $104,000 due to the Company moving offices in both
New York and Edinburgh.
Depreciation and amortization expense for the three months ended September 30,
2005 and 2004 were approximately $224,000 and $340,000, respectively,
representing a decrease of $116,000. The decrease is due to the Company
recording an impairment charge of $5,276,000 at June 30, 2005, which decreased
the cost basis of our methylene blue intangibles.
Liquidity and Capital Resources for the Three Months Ended September 30, 2005
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.
At September 30, 2005, we had cash and cash equivalents and short-term
securities of approximately $60,708,000 and working capital of $55,676,000.
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.
For the three months ended September 30, 2005 and 2004, net cash used in
operating activities was approximately $3,741,000 and $1,222,000, respectively,
representing an increase of approximately $2,519,000. This increase is primarily
due to increased costs associated with (i) our expanded research and development
activity, (ii) selling general and administrative expenses, including an
increased headcount, sales and marketing costs and increased rent expense and
(iii) cash paid for insurance premiums. For the three months ended September 30,
2005 and 2004, net cash used in investing activities was approximately
$15,314,000 and $44,000, respectively, representing an increase of approximately
$15,270,000. This increase is primarily due to our purchase of short term
securities with proceeds from our February 2005 secondary offering in the amount
of approximately $15,175,000. For the three months ended September 30, 2005 and
2004, net cash (used in) or provided by financing activities was approximately
$(84,000) and $54,000 representing an increase of $138,000. This increase is
primarily due to the fact that we did not receive any proceeds this quarter from
the exercise of options, warrants, or other convertible securities where we had
received $180,000 for the three months ended September 30, 2004 for such
matters. This is partially offset by a decrease in dividends paid to our Series
A preferred shareholders which resulted from the conversion of a majority of
these shares that were outstanding for the quarter ended September 30, 2004.
On February 8, 2005, we completed a secondary public offering in which
we sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $55.6 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.
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.
40
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. We 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.
The Company has the following commitments as of September 30, 2005:
Payments Due in
Total 2006 2007 2008 2009 2010
Occupancy Lease 1,514,721 397,780 326,401 316,216 316,216 158,108
Contractual
obligations 433,270 213,786 219,484 0 0 0
-------------------------------------------------------------
Total 1,947,991 611,566 545,885 316,216 316,216 158,108
=============================================================
Summary of Critical Accounting Policies for the year ended June 30, 2005
Financial Reporting Release No. 60, which was released by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of the consolidated financial statements. In
addition, Financial Reporting Release No. 61 was released by the SEC, which
requires all companies to include a discussion to address, among other things,
liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments. The following discussion is intended to supplement the
summary of significant accounting policies as described in Note 1 of the Notes
To Consolidated Financial Statements for the year ended June 30, 2005, included
in the prospectus, which are presented beginning at page F-1.
These accounting policies are considered significant because changes
to certain judgments and assumptions inherent in these policies could affect the
Company's financial statements.
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 104, or SAB 104,
upfront nonrefundable fees associated with research and development
collaboration agreements where the Company has continuing involvement in the
agreement, are recorded as deferred revenue and recognized over the estimated
research and development period using the straight-line method. If the estimated
period is subsequently modified, the period over which the up-front fee is
recognized is modified accordingly on a prospective basis using the
straight-line method. Continuation of certain contracts and grants are dependent
upon the Company and/or its co-development partners' achieving specific
contractual milestones; however, none of the payments received to date are
refundable regardless of the outcome of the project. Upfront nonrefundable fees
associated with licensing arrangements are recorded as deferred revenue and
recognized over the term of the licensing arrangement using the straight line
method, which approximates the life of the patent.
Royalty revenue from product licensees is recorded when persuasive
evidence of an arrangement exists, the price is fixed or determinable, the goods
have been delivered and collectibility is reasonably assured.
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 risk of loss is passed to the customer, the sales
price is fixed and determinable, and collectibility is reasonably assured. As
the customer does not have the right of return the Company does not record a
reserve for sales returns.
41
Revenue related to research and development with our corporate
co-development partner is recognized as research and development contract
revenue when persuasive evidence of an arrangement exists, the services are
performed, and collectibility is reasonably assured. Research & development
contract revenue represents payments due from our co-development partner
relating to the reimbursement of 50% for certain of our ongoing research costs
in the development of clofarabine outside the United States.
The Company follows the guidance of Emerging Issues Task Force, or ETIF,
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
the Company to assess whether it acts as a principal in the transaction or as an
agent acting on behalf of others. The Company records revenue transactions gross
in its statements of operations if it is deemed the principal in the
transaction, which includes being the primary obligor and having the risks and
rewards of ownership.
Stock Based Compensation
In accordance with the provisions of SFAS No. 123, "Accounting for Stock
Based Compensation," or SFAS 123, the Company accounts for stock based
compensation arrangements with employees in accordance with provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees, " or APB 25. 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. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS 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," or EITF 96-18. 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.
We utilize the Black-Scholes model to measure the value of an employee
option. The Black-Scholes model is a trading options-pricing model that neither
considers the non-traded nature of employee stock options, nor the restrictions
on such trading, the lack of transferability or the ability of employees to
forfeit the options prior to expiry. If the model adequately permitted
consideration of the unique characteristics of employee stock options, the
resulting estimate of the fair value of the stock options could be different.
Our estimates of employee stock option values rely on estimates of factors we
input into the Black-Scholes model. The key factors involve an estimate of
future uncertain events. We determine expected volatility based on historical
activity. We believe that these market-based inputs provide a better estimate of
our future stock price movements. We also use historical exercise patterns as
our best estimate of future exercise patterns.
Impairment of Long-Lived Assets
We believe that the accounting estimate relating to impairment of our
intangible assets involves a critical accounting estimation methodology. The
estimate is highly susceptible to change from period to period because it
requires management to make significant judgments and assumptions about future
revenue, operating costs and development expenditures. Some of the more
significant estimates and assumptions inherent in the intangible asset
impairment estimation process include: the timing and amount of projected future
cash flows; the discount rate selected to measure the risks inherent in the
future cash flows; and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory, or economic barriers to entry
as well as expected changes in standard of practice for indications addressed by
the asset. Changes in events or circumstances that may affect long-lived assets,
particularly in the pharmaceutical industry, makes judgments and assumptions
with respect to the future cash flows highly subjective and may include, but are
not limited to, cancellations or terminations of license agreements or the risk
of competition that could render our products noncompetitive or obsolete.
Results of Operations for Year Ended June 30, 2005 Compared to Year Ended June
30, 2004
We reported revenues of approximately $4,651,000 and $3,102,000 for the
years ended June 30, 2005 and 2004, respectively, representing an increase of
approximately $1,549,000. This increase primarily was due to an increase in
license and royalty revenue from milestone payments and royalties received from
certain of our co-development partners in the amount of approximately $450,000,
an increase in research and development contract
42
revenue due to increased sales in the Named Patient Program, increased
reimbursements from Genzyme related to clofarabine research and development
expenses, in the amount of approximately $488,000, and revenue from the sale of
Modrenal(R) of approximately $611,000.
The cost of products sold for years ended June 30, 2005 and June 30,
2004 were approximately $921,000 and $0, respectively. The cost of products sold
reflects the direct costs associated with our sales of Modrenal(R) including
royalties due on the sale of our lead products of approximately $525,000.
Research and development costs for the years ended June 30, 2005 and
2004 were approximately $10,895,000 and $4,883,000 respectively, representing an
increase of $6,012,000.
Our research and development costs include costs associated with the six
projects shown in the table below, five of which the Company currently devotes
time and resources:
Product 2005 2004 Change from prior year
-------- ---- ---- ----------------------
(in thousands)
Clofarabine $8,697 $2,650 $6,047
Modrenal $1,972 $2,026 $(54)
Virostat $131 $48 $83
Velostan $79 $152 $(73)
OLIGON $16 $6 $10
Gene Therapy - - -
Clofarabine research and development costs for the years ended June 30,
2005 and 2004 were approximately $8,697,000 and $2,650,000, respectively,
representing an increase of approximately $6,047,000. The increase primarily
reflects costs which are associated with our increased development activities
and clinical trials of clofarabine being conducted in Europe, certain of which
are partially reimbursed by Genzyme.
Modrenal(R) research and development costs for the years ended June 30,
2005 and 2004 were approximately $1,972,000 and $2,026,000, respectively,
representing a decrease of $54,000. The decrease primarily reflects the
Company's primary focus on clofarabine during this period.
Virostat research and development costs for the years ended June 30,
2005 and 2004 were approximately $131,000 and $48,000, respectively,
representing an increase of $83,000. The increase primarily reflects the costs
associated with the ongoing, multi-center investigator sponsored Phase II
clinical trial being conducted in Egypt and Southern Europe during the year
ended June 30, 2005.
Velostan research and development costs for the years ended June 30,
2005 and 2004 were approximately $79,000 and $152,000, respectively,
representing a decrease of $73,000. The decrease primarily reflects the
Company's primary focus on clofarabine during this period.
OLIGON research and development costs for the years ended June 30, 2005
and 2004 were $16,000 and $6,000, respectively, representing an increase of
$10,000. 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 years ended June 30, 2005 and 2004 due to the Company's focus on
clofarabine during this period.
The clinical trials and development strategy for the clofarabine and
Modrenal(R) projects, in each case, is anticipated to cost several million
dollars and will continue for several years based on the number of clinical
43
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 $14,315,000; (ii) Modrenal(R) research and
development costs have been approximately $6,369,000; (iii) Velostan research
and development costs have been approximately $380,000; (iv) Virostat research
and development costs have been approximately $189,000; (v) OLIGON research and
development costs have been approximately $25,000; and (vi) Gene Therapy
research and development costs have been approximately $451,000.
Selling, general and administrative expenses for the years ended June
30, 2005 and 2004 were approximately $10,182,000 and $9,082,000, respectively,
representing an increase of $1,100,000. This increase primarily is due to:
o an increase in payroll due to the significant increase in employee
headcount in both New York and Edinburgh offices of approximately
$800,000;
o an increase in consulting and legal fees due to the Company's expansion
of regulatory and investor relations initiatives, and the restatement of
the Company's financial statements included in the Company's 2004 annual
report on Form 10-KSB, in the amount of $1,559,000;
o an increase in sales and marketing costs of approximately $592,000
related to the Company's development of a sales and marketing force in
the UK;
o an increase of approximately $250,000 due to an increase in the
Company's annual rent expense; and
o an increase of approximately $97,000 due to an increase in insurance
premiums paid by the Company. These increases are substantially offset
by a decrease in costs associated with the variable accounting treatment
of options issued to an officer of the Company in the amount of
approximately $2,200,000.
Depreciation and amortization expense for the years ended June 30, 2005
and 2004 were approximately $1,439,000 and $1,348,000, respectively,
representing an increase of $91,000. This increase primarily reflects the
corresponding increase in our net asset base.
Provision for bad debts for the years ended June 30, 2005 and 2004 were
approximately $869,000 and $0, respectively. The increase is due to the Company
recording a valuation allowance relating to certain of the outstanding
receivable balances from our co-development partner totaling $869,000 in the
current year. Management believes the amounts billed to its co-development
partner and previously recorded as revenue through March 31, 2005 are
supportable and continues to actively pursue collection of the outstanding
balances. During its quarterly closing process the Company further evaluated the
collectibility of such amounts and concluded that based upon the available
information a valuation allowance was required. Additionally, based on the delay
in payment from our co-development partner and other information, management
concluded that collectibility was no longer reasonably assured and therefore,
did not recognize revenue on amounts billed in the quarter ended June 30, 2005.
Prior to the fourth quarter of 2005, we tested for impairment our
methylene blue intangibles acquired in connection with the Pathagon acquisition
and determined that, based on our assumptions, the sum of the expected future
cash flows, undiscounted and pertaining solely and exclusively to approved
indications, exceeded the carrying value of its long-lived assets and therefore
we did not recognize an impairment. Due to the loss of an intellectual property
patent suit relating to the international use of methylene blue in fresh frozen
plasma, we re-evaluated the intangible asset relating to methylene blue at June
30, 2005. At that date, we estimated that our undiscounted future cash flows,
again relating solely and exclusively to approved uses of methylene blue, were
less than the carrying value. As a result, we recognized a non-cash impairment
loss of $5,276,000, equal to the difference between the estimated future cash
flows for approved uses of methylene blue, discounted at an appropriate rate,
and the carrying amount of the asset. Making the impairment determination and
the amount of impairment requires significant judgment by management and
assumptions with respect to the future cash flows. Changes in events or
circumstances that may affect long-lived assets makes judgments and assumptions
with respect to the future cash flows highly subjective.
44
Results of Operations for Year Ended June 30, 2004 Compared to Year Ended June
30, 2003
We reported revenues of approximately $3,102,000 and $505,000 for the
years ended June 30, 2004 and 2003, respectively. Revenues reflect recognition
of consideration received pursuant to our agreements with co-development and
sub-licensing partners in connection with our platform of drugs and
technologies. Of the revenues recorded for the year ended June 30, 2004,
approximately $2,100,000 was recognized from ILEX (predecessor to Genzyme),
pursuant to the Co-Development Agreement, and approximately $600,000 was
recognized from Stegram Pharmaceuticals under the Stegram Co-Development
Agreement.
Research and development costs for the years ended June 30, 2004 and
2003 were approximately $4,883,000 and $1,689,000 and respectively, representing
an increase of $3,194,000.
Our research and development costs include costs associated with six
projects of which the Company devotes significant time and resource. Clofarabine
research and development costs for the year ended June 30, 2004 and 2003 were
approximately $2,651,000 and $871,000, respectively, representing an increase of
approximately $1,780,000. The increase primarily reflects costs which are
associated with our increased development activities and clinical trials being
conducted in Europe.
Modrenal(R) research and development costs for the year ended June 30,
2004 and 2003 were approximately $2,026,000 and $913,000, respectively,
representing an increase of $1,113,000. The increase primarily reflects
increased development activities associated with the Modrenal(R) development
plan, including costs associated with the U.S. prostate cancer trial which is
ongoing.
Velostan research and development costs were approximately $152,000 and
$30,000, respectively, representing an increase of $122,000. The increase
primarily reflects preparation of a protocol and other preparatory activities in
advance of the Phase I Clinical Trial which has not yet commenced to date.
Gene Therapy research and development costs for the year ended June 30,
2004 and 2003 were approximately $0 and ($130,000), respectively. The 2003
amount primarily reflects a reversal of an accrued expense in the year ended
2002 of $200,000 which was determined to be less than originally estimated by
the Company in the year ended June 30, 2003.
The clinical trials and development strategy for the clofarabine and
Modrenal(R) 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 these four projects is as follows: (i) clofarabine research and
development costs have been approximately $5,600,000; (ii) Modrenal(R) research
and development costs have been approximately $4,400,000; (iii) Velostan
research and development costs have been approximately $302,000; and (iv) Gene
Therapy research and development costs have been approximately $450,000. Our
other two research and development projects involve our two ancillary
technologies; OLIGON and Virostat. We do not currently devote any significant
time or resources to these research and development projects, but we intend to
do so if and to the extent we successfully commercialize our lead drugs,
clofarabine and Modrenal(R), over the next two years.
Selling, general and administrative expenses for the year ended June 30,
2004 and 2003 were approximately $9,082,000 and $4,567,000, respectively,
representing an increase of $4,515,000. Of this amount, approximately $2,400,000
of this increase was due to the re-pricing of 380,000 options granted to an
employee pursuant to the terms of his Employment Agreement (see Note 7 to the
Financial Statements); approximately $1,000,000 of the increase was due to an
increase in sales and marketing expenses related to pre-marketing activities
with clofarabine and marketing costs associated with Modrenal(R); and
approximately $1,100,000 of the increase was due to increases in our consulting
and legal expenses as the result of our recent growth.
We reported interest and finance charges of $0 for the year ended June
30, 2004, representing a decrease of $325,000 from the year ended June 30, 2003.
This decrease reflects the retirement of our credit facility in May 2002 and the
fact that we carried no long term debt during the year ended June 30, 2004.
45
Depreciation and amortization expense totaled approximately $1,348,000
for the year ended June 30, 2004, representing an increase of $3,100 from the
year ended June 30, 2003. The increase is primarily due to the amortization of
certain intangible assets we acquired in the Pathagon transaction which we
acquired during the year ended June 30, 2002.
The Company has been incurring losses since inception and therefore has
not recorded an income tax provision for the years ended June 30, 2005 and 2004.
The Company has recorded a deferred income tax benefit of approximately $0 and
$1,460,000 for the years ended June 30, 2005 and 2004, respectively.
Liquidity and Capital Resources for the Year ended June 30, 2005
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.
On June 30, 2005, we had cash and cash equivalents of approximately
$31,408,000, short-term securities of $32,747,000 and working capital of
$60,112,000. 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.
On February 8, 2005, we completed a secondary public offering in which
we sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $55.7 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.
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 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. We 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.
The Company received a nonrefundable upfront payment of $1.35 million
when it entered into the co-development agreement with Genzyme and received an
additional $3.5 million in December 2003 when it converted Genzyme's option to
market clofarabine in the U.S. into a sublicense. Upon Genzyme's filing the New
Drug Application for clofarabine with FDA, the Company received an additional
(i) $2 million in April 2004 and (ii) $2 million in September 2004. 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
46
period, through March 2021. For the years ended June 30, 2005 and 2004, the
Company recognized revenues of approximately $438,000 and $161,000 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 Genzyme.
The Company defers 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 $219,000 and $81,000
for the years ended June 30, 2005 and 2004, 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 in May
2003. The Company deferred the upfront payment and recognizes revenues ratably,
on a straight-line basis over the related royalty period, currently through
September 2022. The Company recognized revenues of approximately $87,000 and
$114,000 in connection with the upfront payment from Dechra for the years ended
June 30, 2005 and 2004, 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 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 $17,400 and $23,000 for the years ended June 30, 2005 and 2004,
respectively.
The Company has the following commitments as of June 30, 2005:
Total 2006 2007 2008 2009 2010 Thereafter
Occupancy lease 1,676,140 559,199 326,401 316,216 316,216 158,108 0
Contractual
obligations 433,270 213,786 219,484 0 0 0 0
----------------------------------------------------------------------------
Total 2,109,410 772,985 545,885 316,216 316,216 158,108 0
============================================================================
Off-balance sheet arrangements
We have no off-balance sheet arrangements.
Restatement
On May 23, 2005, management and the audit committee of the Company
concluded that financial statements included in its annual report on Form 10-KSB
for the fiscal year ended June 30, 2004, should not be relied upon because of a
requirement to correct the Company's tax accounting related to the acquisition
of Pathagon, Inc. in February 2002 which was identified during the review
process of the financial statements to be included in the Company's quarterly
report on Form 10-QSB for the quarter ended March 31, 2005. Accordingly, the
Company restated its financial statements included in its annual report on Form
10-KSB for the year ended June 30, 2004 (the "10-KSB/A"). The Company's 10-KSB/A
was filed on June 29, 2005.
On May 24, 2005, the Company received a notice from the Nasdaq staff
indicating that the Company was not in compliance with Nasdaq's requirements for
the continued listing due to its failure to timely file its Form 10-QSB for the
period ended March 31, 2005, as required under Marketplace Rule 4310(c)(14) and
that therefore its common stock was subject to delisting from The Nasdaq Stock
Market. The notice does not by itself result in immediate delisting of the
common stock, although Nasdaq stated that unless the Company timely requested a
hearing, the Company's securities would be delisted from The Nasdaq Stock Market
at the opening of business on June 2, 2005. The Company made a timely request
for a hearing with the Nasdaq Listing Qualifications Panel to review the Nasdaq
staff's determination which stayed the delisting pending the hearing and a
determination by the Nasdaq Listing Qualifications Panel. On June 29, 2005, the
Nasdaq Listings Qualifications Panel approved Bioenvision's request for
continued listing on the Nasdaq National Market and the fifth character "E" was
removed from Bioenvision's trading symbol on the opening of trading on Friday,
July 1, 2005.
47
Subsequent Events
As disclosed in Bioenvision's current report on Form 8-K filed on
November 28, 2005, on November 21, 2005, Bioenvision, Inc. (the "Company")
received a Nasdaq Staff Determination Letter (the "Letter") indicating that the
Company failed to comply with Nasdaq Marketplace Rules 4350(c)(4)(A) and
4350(c)(4)(B), requirements for continued listing on the Nasdaq Stock Market and
that the Company's common stock was therefore subject to delisting. Rules
4350(c)(4)(A)and (B) provide:
(4) Nomination of Directors
(A) Director nominees must either be selected, or recommended for the
board's selection, either by:
(i) a majority of the independent directors, or
(ii) a nominations committee comprised solely of
independent directors.
(B) Each issuer must certify that it has adopted a formal written
charter or board resolution, as applicable, addressing the
nominations process and such related matters as may be required
under the federal securities laws
Upon receipt of the Letter, the Company's board of directors (the
"Board") adopted resolutions approving a director nomination policy whereby in
connection with the nomination of candidates to the Board, director nominees
will either be selected, or recommended for the Board's selection, by a majority
of the independent directors of the Board. In addition, the Company certified to
the Nasdaq Staff that it has taken this action and is in compliance with Rules
4350(c)(4)(A) and 4350(c)(4)(B). On November 23, 2005, the Company received a
notification from the Nasdaq Staff that it had regained compliance with Rules
4350(c)(4)(A) and 4350(c)(4)(B) and that the matter was closed.
Recent Accounting Pronouncements
On July 1, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123
(R)"), requiring the Company to recognize expense related to the fair value of
stock-based compensation. The modified prospective transition method was used as
allowed under SFAS No. 123 (R). Under this method, the stock-based compensation
expense includes: (a) compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of July 1, 2005, based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation"; and (b) compensation
expense for all stock-based compensation awards granted subsequent to July 1,
2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123 (R). Prior to the adoption of SFAS 123 (R), the
Company had accounted for stock based compensation arrangements in accordance
with provisions of Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees", as permitted by SFAS No. 123,
"Accounting for Stock Based Compensation." Under APB Opinion No. 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.
In December 2004, the FASB issued SFAS 153 "Exchange of Nonmonetary
Assets". This statement was a result of a joint effort by the FASB and the
International Accounting Standards Board, or 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 Nonmonetary 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 nonmonetary
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 was
effective for non-monetary assets exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS 153 did not have a material
impact on the results of operations or financial position of the company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
151 amends Accounting Research Bulletin, or 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 did
not have a material impact on the results of operations or financial position of
the company.
48
BUSINESS
Overview
We are a product-focused biopharmaceutical company with two approved
cancer therapeutics. In December 2004, the Food and Drug Administration, or FDA,
approved our lead cancer product, clofarabine, for the treatment of pediatric
acute lymphoblastic leukemia, or ALL, in patients who are relapsed or refractory
to at least two prior regimens of treatment. 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 E.U. Genzyme Corporation, our co-development partner, currently
holds marketing rights in the U.S. and Canada for clofarabine for certain cancer
indications and currently controls U.S. development of clofarabine in these
indications. Genzyme is marketing clofarabine under the brand name Clolar(R) in
the U.S. In Europe, we have filed for approval of clofarabine in pediatric ALL
with the European Medicines Evaluation Agency, or EMeA. If approved, we
anticipate commencing sales in Europe during the first half of calendar 2006
through a dedicated European sales force. We are selling our second product,
Modrenal(R), in the U.K., through our sales force of eight sales specialists.
Modrenal(R) is approved in the U.K. for the treatment of post-menopausal
advanced breast cancer following relapse to initial hormone therapy.
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. Further, we intend to penetrate all of the other markets within the E.U.
upon establishing traction in the E.U's major markets.
Products and pipeline
Candidate Indication Status U.S. and Canada Ex-U.S. and
rights Canada
rights
------------------- ---------------- ---------------------- --------------- -------------
Clofarabine Relapsed or Marketed in U.S. Genzyme Bioenvision
(Clolar(R)) Refractory (pediatric); Filed
Acute in E.U. (pediatric)
Lymphoblastic
Leukemia (ALL)
------------------- ---------------- ---------------------- --------------- -------------
Acute Phase II in E.U. Genzyme Bioenvision
Myelogenous (adult)
Leukemia (AML)
------------------- ---------------- ---------------------- --------------- -------------
Refractory Phase II in U.S. Genzyme Bioenvision
Chronic (adult)
Lymphocytic
Leukemia (CLL)
------------------- ---------------- ---------------------- --------------- -------------
Solid Tumors Phase I (Intravenous) Genzyme Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Solid Tumors Phase I (Oral) Genzyme Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Non-Cancer Developmental Bioenvision Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Modrenal(R) Breast Cancer Marketed in U.K.; Bioenvision Bioenvision
Phase IV in U.K.;
Phase II in U.K.
------------------- ---------------- ---------------------- --------------- -------------
Prostate Cancer Phase II in U.S. Bioenvision Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Virostat Hepatitis C Investigator Bioenvision Bioenvision
Sponsored Phase II
in Europe and Middle
East
------------------- ---------------- ---------------------- --------------- -------------
49
Our Products
Clofarabine (Clolar(R))
On December 28, 2004, clofarabine was approved by the FDA after a "fast
track" review for the treatment of pediatric patients, ages one to 21, with
relapsed or refractory ALL after at least two prior regimens. Genzyme currently
maintains rights to market the drug for certain cancer indications in the U.S.
and Canada and we are currently receiving royalties on these sales. Genzyme is
marketing clofarabine under the brand name Clolar(R). We also 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. We expect an
opinion from the EMeA in the second half of calendar 2005. Clofarabine received
Orphan Drug designation in the U.S. and in Europe, which provides ten years of
marketing exclusivity in Europe and seven years of marketing exclusivity in the
U.S. Further, in July 2004, the FDA granted a six-month extension of the
marketing exclusivity for clofarabine in pediatric ALL under the federal Best
Pharmaceuticals for Children Act.
Pediatric leukemia is the most prevalent form of cancer among children
up to age 19 in the U.S. It is estimated that approximately 3,400 children were
diagnosed with leukemia in the U.S. in 2004, with ALL accounting for over 75% of
the incidence rate. Although survival rates for childhood leukemia have improved
significantly since the early 1970's, approximately 20% of pediatric patients
with ALL and 60% of pediatric patients with AML do not achieve long-term
survival and we believe there is a medical need for new agents to treat this
population of patients. Clofarabine is approved for the treatment of pediatric
patients, ages one to 21, with relapsed or refractory ALL after at least two
prior regimens. The adult leukemia market represents a potentially significantly
larger commercial opportunity with over 11,500 patients with AML and over 8,000
patients with CLL, diagnosed each year within the U.S. Based on population and
incidence rates data, we believe that the E.U. patient population with pediatric
leukemias and adult AML and CLL approximates that of the U.S.
Clofarabine is a purine nucleoside analog, which is a small molecule,
that we are developing with Genzyme, our co-development partner, for the
treatment of acute and chronic leukemias, lymphomas and solid tumors.
Clofarabine attacks cancer cells by damaging DNA in cancer cells, preventing DNA
repair by damaged cancer cells, damaging the cancer cell's important control
structures, and initiating the process of programmed cell death, or apoptosis,
in cancer cells. Clofarabine appears to combine many of the favorable properties
of the two most commonly used purine nucleoside analog drugs, fludarabine and
cladribine, but appears to have greater potency at damaging the DNA of leukemia
cells and a broader range of clinical activity.
In the U.S., pivotal Phase II clinical trials were conducted for the
treatment of relapsed or refractory acute leukemia in children and a NDA was
filed by Genzyme with the FDA in March 2004, based upon the interim results of
70 patients enrolled in these two trials. In August of 2004, clinical data on an
additional cohort of 14 patients were submitted to the FDA and of the aggregate
ALL group of 49 patients, a 31% overall response rate was achieved, and of the
aggregate AML group of 35 patients, a 26% overall response rate was achieved.
In Europe, we facilitated an investigator sponsored trial, or an IST, of
clofarabine as first line therapy for older adult patients with AML who were
unsuitable for intensive chemotherapy. The IST was closed to recruitment in
August 2004 because a 67% overall response rate was achieved. This response rate
was more than three times greater than the expected response rate under the
current standard of care for this patient population and the investigator
determined that these positive results warranted accelerated initiation of the
Phase II regulatory study of clofarabine as a first-line treatment for older
adult patients newly diagnosed with AML. We expect to complete the Phase II
trial in calendar 2005 and anticipate that it will form the basis for an E.U.
regulatory submission for approval in this indication.
On December 1, 2004 the FDA's Oncologic Drug Advisory Committee, or
ODAC, convened to determine if clinical data from Phase II trials in relapsed
and refractory pediatric ALL and AML demonstrated a durable clinical response
that would predicate a clinical benefit in future clinical administration. The
panel voted in favor of the approval of clofarabine for pediatric ALL under its
accelerated approval pathway and voted against immediate
50
marketing in pediatric AML, requesting additional information. In connection
with the approval that was granted by the FDA, Genzyme is required to conduct
further controlled clinical studies of clofarabine to verify and describe its
clinical benefit in ALL.
Clofarabine is currently being evaluated in an IST Phase II clinical
trial for refractory CLL in the U.S. In addition, commencing in Q1 2006, we
intend to investigate clofarabine in European Phase II clinical trials for CLL
and indolent lymphoma. In pre-clinical studies, clofarabine has shown anti-tumor
activity against several human cancers, including cancers of the lung, colon,
kidney, breast, pancreas and prostate, as well as its action against leukemia
cells. The initial data from the Phase I clinical trials indicate activity for
clofarabine in certain solid tumor types. We believe this level of activity
against solid tumors distinguishes clofarabine from other purine nucleoside
analogs. We intend to develop clofarabine as a potential drug for the treatment
of certain solid tumors, such as colon, pancreatic, lung, breast and prostate
cancer. Currently, we anticipate the initial Phase I clinical trials for
clofarabine, using both the oral and intravenous formulations, in solid tumors
will be completed by end of calendar year 2005.
Pursuant to the terms of our co-development agreement with Genzyme, the
successor-in-interest to ILEX Oncology, Inc., both parties are required to share
promptly all information, including clinical data, generated under the
co-development program and Genzyme is obligated to pay all of the U.S. and
Canadian research and development costs and 50% of all approved ex-U.S. and
Canada research and development costs (except for Japan and Southeast Asia and
except for non-cancer indications). If additional resources are required above
the agreed upon costs, we may elect to pay these additional costs and certain of
these payments will be credited against future royalty payments to Genzyme at
the rate of $1.50 for every $1.00 of additional expenditures. Under the
co-development agreement with Genzyme, we receive royalties on Genzyme's annual
net sales on a sliding scale based on the level of annual net sales. Similarly,
we pay a royalty to Genzyme and Southern Research Institute, or SRI, the
inventor of clofarabine, on our European annual net sales.
Pursuant to the terms of our co-development agreement with SRI, we have
the exclusive license to market and distribute clofarabine throughout the world
for all human applications except for certain U.S. and Canadian cancer
indications and except for any indications in Japan and Southeast Asia. Our
exclusive license expires upon the last to expire of the patents used or useful
in connection with the development and marketing of clofarabine, which we expect
to expire in 2021. In addition, we hold an exclusive option from SRI to market
and distribute clofarabine in Japan and Southeast Asia for all human
applications. We intend to convert the option to a license upon sourcing an
appropriate co-marketing partner to develop these rights in Japan and Southeast
Asia.
Modrenal(R)
We currently market Modrenal(R) (trilostane) in the U.K. for the
treatment of post-menopausal advanced breast cancer following relapse to initial
hormone therapy. We have a team of eight sales specialists and two marketing
executives selling and marketing Modrenal(R) in the U.K.
Modrenal's(R) approved indication enables us to promote Modrenal(R) for
use immediately after relapse to initial hormone therapy such as tamoxifen or
one of a class of drugs known as aromatase inhibitors (including Faslodex and
Arimidex). However, we are initially positioning Modrenal(R) as a third or
fourth line treatment option in post-menopausal advanced breast cancer. In the
five largest E.U. countries (France, Germany, Italy, Spain and the U.K.), we
believe approximately 520,000 women are currently living with post-menopausal
advanced breast cancer of which over a third require third or fourth line agents
following prior treatment failure.
Modrenal(R) has been extensively studied in clinical trials in the U.S.,
Europe and Australia, and an analysis, known as a meta-analysis, of a series of
these clinical studies, that together included 714 patients with post-menopausal
advanced breast cancer who received Modrenal(R) has been conducted. Overall, a
clinical benefit rate of 35% was achieved in patients with both
hormone-sensitive and hormone-insensitive breast cancers. Generally, a clinical
benefit is achieved when a patient's disease disappears, is decreased by greater
than fifty percent or is stabilized for at least six months. In a sub-set
analysis of these clinical trial data, a clinical benefit rate of 46% was
achieved for 351 patients with hormone-sensitive breast cancer who had responded
to one or more prior hormonal therapies and were given Modrenal(R) upon relapse
of the cancer. In one of the studies which was conducted in Australia, a
clinical benefit rate of 55% was achieved for 64 patients who received
Modrenal(R) having previously
51
responded to tamoxifen and subsequently relapsed. We believe these data compare
favorably to currently marketed aromatase inhibitors and other agents given as
second line or subsequent therapies. Furthermore, Modrenal(R) has an acceptable
side-effect profile. On the basis of these data, Modrenal(R) was granted a
product license in the U.K. for the treatment of post-menopausal advanced breast
cancer following relapse to initial hormone therapy.
We began marketing Modrenal(R) in May 2004 in the U.K. for the treatment
of post-menopausal advanced breast cancer following relapse to initial hormone
therapy. We also intend to seek regulatory approval for Modrenal(R) in the U.S.
as a therapy for hormone-sensitive breast cancers and hormone independent
prostate cancers, but this strategy is dependent upon the results of the ongoing
clinical trials and the resource capability of the Company. Our ongoing clinical
trials in breast cancer target patients that have hormone-sensitive cancers and
have become refractory to prior hormone treatments, such as tamoxifen or any of
the aromatase inhibitors. In addition, there is an ongoing Phase II clinical
trial of Modrenal(R) in the U.S. that is focused on patients who have androgen
independent prostate cancer and have a rising prostate specific antigen, or PSA,
level.
In mid-2005 we began enrollment in a U.K., Phase IV study in
post-menopausal advanced breast cancer, a Phase II study in pre-menopausal
breast cancer and a Phase II study in neo-adjuvent, pre-operative breast cancer.
We plan to use the data from these clinical trials to support a filing process
for mutual recognition for approval of Modrenal(R) on a country-by-country basis
in Europe. Each such approval, if granted, would be based upon Modrenal's(R)
approval in the U.K. for post-menopausal advanced breast cancer following
relapse to initial hormone therapy. The grant of any such approval is entirely
within the control of the individual regulatory authorities.
We have the exclusive right to market and distribute Modrenal(R)
throughout the world for all human applications, except for South Africa and
Japan where the drug is marketed for the treatment of low-renin hypertension.
Our exclusive license expires upon the last to expire of the patents used or
useful in connection with the marketing of Modrenal(R). Given that we have new
patent applications filed, which are subject to issuance, we expect the last of
our underlying patents to expire in 2020.
Other Products and Technologies
We anticipate that revenues derived from our two lead drugs, clofarabine
and Modrenal(R) will permit us to further develop the other products currently
in our product pipeline. The work to date on these compounds has been limited
because of the need to concentrate on clofarabine and Modrenal(R) but management
believes these compounds have potential value.
Virostat
Virostat, especially when irradiated by light, acts by preventing
replication of nucleic acid (DNA and RNA) in pathogens. Investigator sponsored
Phase II clinical trials are ongoing in Europe and the Middle East to study
Virostat's use in treating hepatitis C virus infection and we announced interim
results at the UBS Global Life Sciences Conference in New York on September 28,
2005. Virostat was given to 25 patients with genotype 4 hepatitis C who had
failed a prior treatment, including interferon in many of the patients. Sixteen
(64%) of the patients had cirrhosis. Virostat was given orally for 100 days and
measurement of the viral load was made at 50 days. At 50 days, 22 (88%) patients
had shown a reduction in viral load of greater than 70%. Of these responders, 14
(64%) had a clearance of greater than 90%, with four responders having complete
viral clearance.
Seven of the 25 patients have had viral load measured at 100 days. Six
of these patients show continued reduction in viral load and the seventh
patient, who had been one of the three non-responders at 50 days, had a greater
than 90% reduction in viral load. No major adverse events were noted.
Methylene blue is currently used in several European countries to
inactivate pathogens, notably certain viruses, in fresh frozen plasma. Prior to
the fourth quarter of 2005, we tested for impairment our methylene blue
intangibles acquired in connection with the Pathagon acquisition and determined
that, based on our assumptions, the sum of the expected future cash flows,
undiscounted and pertaining solely and exclusively to approved indications,
exceeded the carrying value of its long-lived assets and therefore we did not
recognize an impairment. Due to the loss of an intellectual property patent suit
relating to the international use of methylene blue in fresh frozen plasma we
re-evaluated the intangible asset relating to methylene blue at June 30, 2005.
At that date, we estimated that our
52
undiscounted future cash flows, again relating solely and exclusively to
approved uses of methylene blue, were less than the carrying value. As a result,
we recognized a non-cash impairment loss of $5,276,000, equal to the difference
between the estimated future cash flows for approved uses of methylene blue,
discounted at an appropriate rate, and the carrying amount of the asset. Making
the impairment determination and the amount of impairment requires significant
judgment by management and assumptions with respect to the future cash flows.
Changes in events or circumstances that may affect long-lived assets makes
judgments and assumptions with respect to the future cash flows highly
subjective.
Velostan
Velostan is a cytostatic drug we are investigating in Europe. Velostan
is the first compound in a group of chemically related compounds that are
believed to work by blocking cell division and reversing the malignant process
in the cancer cell. We believe the optical isomer we have developed is more
active and less toxic than its parent compound.
OLIGON(R) Technology
With the acquisition of Pathagon in February 2002, we acquired patents,
technology and technology patents relating to OLIGON(R) anti-infective
technology, and have licensed rights from Oklahoma Medical Research Foundation
for the use of thiazine dyes, including methylene blue, for other anti-infective
uses.
The OLIGON(R) technology is based on the antimicrobial properties of
silver ions. The broad spectrum activity of silver ions against bacteria,
including antibiotic-resistant strains, has been known for decades. OLIGON(R)
materials have application in a wide range of devices and products, including
vascular access devices, urology catheters, pulmonary artery catheters and
thoracic devices, renal dialysis catheters, orthopedic devices and several other
medical and consumer product applications. One application of the OLIGON(R)
technology has been licensed to a third party, which is currently marketing the
technology in its line of short-term vascular access catheters. Six U.S. patents
for the OLIGON(R) technology have been granted and additional patents have been
filed. In addition, patents have been filed in Europe, Canada and Japan.
Gene Therapy Technology
Our product portfolio also includes a variety of gene therapy products
that, we believe, may offer advancements in the field of cancer treatment and
may have additional applications in certain non-cancer diseases such as
diabetes, cystic fibrosis and other auto-immune disorders. Pursuant to a
co-development agreement with the Royal Free and University College Medical
School and a Canadian biotechnology company, we are developing gene vector
technologies which, based on pre-clinical research and early Phase I clinical
trials, we believe have potential in a wide array of clinical conditions. To
date, the technology has undergone small-scale clinical testing with the albumin
and thrombopoietin genes. The results showed the technology is capable of
producing a prolonged elevation in serum albumin levels in cancer and cirrhosis
patients with hypo-albuminemia, a serious physiological disorder.
Animal Health Products
We also have one animal health product, Vetoryl(R) (trilostane), at
market in the United Kingdom 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 U.K., 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 posted more than
$400,000 of sales of the drug. Arnolds has licensed the drug from us for sale in
the U.K. market in consideration of a payment of a 5% royalty on sales.
Separately, in May 2003, we granted to Dechra Pharmaceuticals, PLC, an affiliate
of Arnolds Ltd., the exclusive right to market the drug in the U.S. for $5.5
million of total consideration (including milestone payments) and a royalty of
2%-4% of annual net sales.
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Patents and Proprietary Rights
Our success will depend, in part, upon our ability to obtain and enforce
protection for our products under U.S. and foreign patent laws and other
intellectual property laws, preserve the confidentiality of our trade secrets
and operate without infringing the proprietary rights of third parties. Our
policy is to file patent applications in the U.S. and/or foreign jurisdictions
to protect technology, inventions and improvements to our inventions that are
considered important to the development of our business. Also, we will rely upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop a competitive position.
Through our current license agreements, we have acquired the right to
utilize the technology covered by several issued patents and patent
applications, as well as additional intellectual property and know-how that
could be the subject of further patent applications in the future. We evaluate
the desirability of seeking patent or other forms of protection for our products
in foreign markets based on the expected costs and relative benefits of
attaining this protection. There can be no assurance that any patents will be
issued from any applications or that any issued patents will afford adequate
protection to us. Further, there can be no assurance that any issued patents
will not be challenged, invalidated, infringed or circumvented or that any
rights granted thereunder will provide competitive advantages to us. Parties not
affiliated with us have obtained or may obtain U.S. or foreign patents or
possess or may possess proprietary rights relating to our products. There can be
no assurance that patents now in existence or hereafter issued to others will
not adversely affect the development or commercialization of our products or
that our planned activities will not infringe patents owned by others.
As a result of the licenses described above, we are the exclusive
licensee or sublicensee of three U.S. patents expiring in 2005, 2008 and 2014
relating to compounds, pharmaceutical compositions and methods of use
encompassing clofarabine. We have also filed two United States patent
applications relating to the use of clofarabine in autoimmune diseases. Although
the composition of matter patents to trilostane have expired, we are the
exclusive licensee of several United States and foreign patent applications
relating to the use of trilostane alone or in combination with anticancer agents
and the exclusive licensee to a manufacturing process patent for trilostane. In
addition, for Gene Therapy we have international process and use patent
applications filed which, if patents are issued, will expire in April 2018 and
for OLIGON we have process, use and composition of matter patents in the U.S.
and internationally which expire on or before April 2019 and a patent
application in Japan which expires in October 2018.
We could incur substantial costs in defending ourselves in infringement
suits brought against us or any of our licensors or in asserting any
infringement claims that we may have against others. We could also incur
substantial costs in connection with any suits relating to matters for which we
have agreed to indemnify our licensors or distributors. An adverse outcome in
any litigation could have a material adverse effect on our business and
prospects. In addition, we could be required to obtain licenses under patents or
other proprietary rights of third parties. No assurance can be given that any of
these licenses would be made available on terms acceptable to us, or at all. If
we are required to, and do not obtain any required licenses, we could be
prevented from, or encounter delays in, developing, manufacturing or marketing
one or more of our products.
We also rely upon trade secret protection for our confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose this
technology or that we can meaningfully protect our trade secrets.
It is our policy to require our employees, consultants and parties to
collaborative agreements to execute confidentiality agreements upon the
commencement of employment or consulting relationships or a collaboration with
us. These agreements provide that all confidential information developed or made
known during the course of the relationship with us is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees, the agreements provide that all inventions resulting from work
performed for us, utilizing our property or relating to our business and
conceived or completed by the individual during employment shall be our
exclusive property to the extent permitted by applicable law.
54
Sales and Marketing
Currently we have an arrangement in place with Genzyme for the
co-development and marketing of one of our lead products, clofarabine, and
another arrangement with Edwards Lifesciences for the marketing of short-term
vascular access catheters using the OLIGON(R) technology. We have also engaged
in our own marketing and sales efforts in connection with the marketing and sale
of Modrenal(R) in the U.K. 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. However, in order
to market any of our products effectively, we would need to establish a much
more integrated marketing and sales force with technical expertise and
distribution capability or contract with other pharmaceutical and/or health care
companies with distribution systems and direct sales forces.
Our marketing policy is to generate awareness of our products and target
the two key audiences for our products, doctors and patients. Medical education
is also a priority, with the use of peer-opinion leaders, clinical trials at
major centers, satellite symposia and conferences, product advertising in
specific scientific journals and trained sales personnel. Patient education is
carefully controlled and is important to our marketing approach.
Manufacturing
Our strategy is to enter into collaborative arrangements with other
companies for the clinical testing, manufacture and distribution of the
products. Manufacturers of our products will be subject to Good Manufacturing
Practices prescribed by the FDA or other rules and regulations prescribed by
foreign regulatory authorities, which may change from time to time. We do not
have and do not intend to establish any internal product testing, manufacturing
or distribution capabilities.
Research and Development
In developing new products, we consider a variety of factors including:
(i) existing or potential marketing opportunities for these products; (ii) our
capability to arrange for these products to be manufactured on a commercial
scale; (iii) whether or not these products complement our existing products;
(iv) the opportunities to leverage these products with the development of
additional products; and (v) the ability to develop co-marketing relationships
with pharmaceutical and/or other companies with respect to the products. We
intend to fund future research and development activities at a number of medical
and scientific centers in Europe and the United States. Costs related to these
activities are expected to include: clinical trial expenses; drug production
costs; salaries and benefits of scientific, clinical and other personnel; patent
protection costs; analytical and other testing costs; professional fees; and
insurance and other administrative expenses. We have spent approximately
$10,895,000 and $4,883,000 on research and development activities for the fiscal
years ended June 30, 2005 and 2004 respectively.
Government Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our drug delivery products.
The process required by the FDA under the new drug provisions of the
Federal Food, Drug and Cosmetics Act before our products may be marketed in the
United States generally involves the following:
o pre-clinical laboratory and animal tests;
o submission to the FDA of an investigational new drug
application, or IND, which must become effective before clinical
trials may begin;
o adequate and well-controlled human clinical trials to establish
the safety and efficacy of the proposed pharmaceutical in our
intended use;
55
o submission to the FDA of a new drug application; and
o FDA review and approval of the new drug application.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. The results of the pre-clinical
tests, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND, which must become effective before we
may begin human clinical trials. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day time period, raises
concerns or questions about the conduct of the trials as outlined in the IND and
imposes a clinical hold. In such a case, the IND sponsor and the FDA must
resolve any outstanding concerns before clinical trials can begin. There is no
certainty that pre-clinical trials will result in the submission of an IND or
that submission of an IND will result in FDA authorization to commence clinical
trials.
Clinical trials involve the administration of the investigational
product to human subjects under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be conducted under
the auspices of an independent institutional review board at the institution
where the study will be conducted. The institutional review board will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution.
Human clinical trials are typically conducted in three sequential phases
which may overlap:
PHASE I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion;
PHASE II: Studies are conducted in a limited patient population to
identify possible short term adverse effects and safety risks, to
determine the efficacy of the product for specific targeted diseases and
to determine dosage tolerance and optimal dosage;
PHASE III: Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety in an expanded patient
population, often at geographically dispersed clinical study sites.
Phase III or IIb/III trials are often referred to as pivotal trials, as
they are used for the final approval of a product.
In the case of products for life-threatening diseases such as cancer,
the initial human testing is often conducted in patients with disease rather
than in healthy volunteers. Since these patients already have the targeted
disease or condition, these studies may provide initial evidence of efficacy
traditionally obtained in Phase II trials and so these trials are frequently
referred to as Phase I/II trials. We cannot be certain that we will successfully
complete Phase I, Phase II or Phase III testing of our product candidates within
any specific time period, if at all. Furthermore, we, the FDA, the institutional
review board or the sponsor may suspend clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application for approval
of the marketing and commercial shipment of the product. The FDA may deny a new
drug application if the applicable regulatory criteria are not satisfied or may
require additional clinical data. Even if the additional data is submitted, the
FDA may ultimately decide that the new drug application does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product approval if
compliance with regulatory standards for production and distribution is not
maintained or if safety problems occur after the product reaches the market. In
addition, the FDA requires surveillance programs to monitor approved products
which have been commercialized, and the agency has the power to require changes
in labeling or to prevent further marketing of a product based on the results of
these post-marketing programs.
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The FDA has a Fast Track program intended to facilitate the development
and expedite the review of drugs that demonstrate the potential to address unmet
medical needs for treatment of serious or life-threatening conditions. Under
this program, if the FDA determines from a preliminary evaluation of clinical
data that a fast track product may be effective, the FDA can review portions of
a new drug application for a Fast Track product before the entire application is
complete, and undertakes to complete its review process within six months of the
filing of the new drug application. The FDA approval of a Fast Track product can
include restrictions on the product's use or distribution such as permitting use
only for specified medical procedures or limiting distribution to physicians or
facilities with special training or expertise. The FDA may grant conditional
approval of a product with Fast Track status and require additional clinical
studies following approval.
Satisfaction of FDA requirements or similar requirements of state, local
and foreign regulatory agencies typically takes several years and the actual
time required may vary substantially, based upon the type, complexity and
novelty of the pharmaceutical product. Government regulation may delay or
prevent marketing of potential products for a considerable period of time and
impose costly procedures upon our activities. Success in pre-clinical or early
stage clinical trials does not assure success in later stage clinical trials.
Data from pre-clinical and clinical activities is not always conclusive and may
be susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications. Further, even
after the FDA approves a product, later discovery of previously unknown problems
with a product may result in restrictions on the product or even complete
withdrawal of the product from the market.
Any products manufactured or distributed under FDA clearances or
approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the products. Drug manufacturers and their subcontractors are required to
register with the FDA and state agencies, and are subject to periodic
unannounced inspections by the FDA and state agencies for compliance with good
manufacturing practices, which impose procedural and documentation requirements
upon manufacturers and their third party manufacturers
We are subject to numerous other federal, state, local and foreign laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply with
such laws and regulations now or in the future. In addition, we cannot predict
what adverse governmental regulations may arise from future United States or
foreign governmental action.
We also are subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products which we sell
outside the U.S. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country. Whether or not we obtain FDA approval, we must obtain approval of a
product by the comparable regulatory authorities of foreign countries before
manufacturing or marketing the product in those countries. The approval process
varies from country to country and the time required for these approvals may
differ substantially from that required for FDA approval. We cannot be assured
that clinical trials conducted in one country will be accepted by other
countries or that approval in one country will result in approval in any other
country. For clinical trials conducted outside the U.S., the clinical stages
generally are comparable to the phases of clinical development established by
the FDA.
Competition
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are developing cancer drugs similar to ours. There are
products on the market that will compete directly with the products that we are
seeking to develop. In addition, colleges, universities, government agencies and
other public and private research institutions will continue to conduct research
and are becoming more active in seeking patent protection and licensing
arrangements to collect license fees, milestone payments and royalties in
exchange for license rights to technologies that they have developed, some of
which may directly compete with our technologies. These companies and
institutions also compete with us in recruiting qualified scientific personnel.
Many of our competitors have substantially greater financial, research and
development, human and other resources than we do. Furthermore, large
pharmaceutical companies have significantly more
57
experience than we do in preclinical testing, human clinical trials and
regulatory approval procedures. Our competitors may develop safer or more
effective products than ours, obtain patent protection or intellectual property
rights that limit our ability to commercialize products, or commercialize
products more quickly than we can.
We expect technology developments in our industry to continue to occur
at a rapid pace. Commercial developments by our competitors may render some or
all of our potential products obsolete or non-competitive, which would
materially harm our business and financial condition.
Employees
As of December 7, 2005, we had 30 full-time employees based in New York,
New York, and Edinburgh, Scotland. Of these, 3 are in management, 4 are in
legal/accounting, 10 are in sales/marketing, 5 are in administration and 8 are
in research and development. We believe our relationships with our employees are
satisfactory.
Description of Property
As of the date of this report we do not own any interest in real
property. We currently lease 5,549 square feet of office space at our principal
executive offices at 345 Park Avenue, 41st Floor, New York, New York 10154 for
base rent of approximately $26,351 per month. These facilities are the center
for all of our administrative functions in the United States. Also, we rent
approximately 2,437 square feet of office space in Edinburgh, Scotland for
approximately (pound)14,400 per month. To date, most of our drug development
programs have been conducted at scientific institutions around the world. It is
our policy to continue development at leading scientific institutions in the
U.S. and Europe. We do not plan to conduct laboratory research in any of our
facilities in the near future, rather, we plan to conduct research through
collaborative arrangements with SRI and others.
Legal Proceedings
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. Each of the parties has moved for summary
judgment dismissing all but one of the claims of the other parties. Those
motions have all been denied by the Court, and a trial date has been set for
early 2006.
Corporate Information
We were incorporated as Express Finance, Inc. under the laws of the
State of Delaware on August 16, 1996, and changed our name to Ascot Group, Inc.
in August 1998 and further to Bioenvision, Inc. in January 1999. Our principal
executive offices are located at 345 Park Avenue, 41st Floor, New York, New York
10154. Our telephone number is (212) 750-6700 and our fax number is (212)
750-6777. Our website is www.bioenvision.com. Information included or referred
to on our website is not incorporated by reference in or otherwise a part of
this prospectus. Our website address is included in this prospectus as an
inactive textual reference only.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our excess cash is invested in certificates of deposit with various
short-term maturities. We hold no derivative financial instruments and we do not
currently engage in hedging activities. We do not have any outstanding debt.
Accordingly, due to the maturity and credit quality of our investments, we are
not subjected to any substantial risk arising from changes in interest rates,
currency exchange rates and commodity and equity prices. However the company
does have some exposure to foreign currency rate fluctuations arising from
maintaining an office for the Company's U.K. based, wholly owned subsidiary
which transacts business in the local functional currency. Management
periodically reviews such foreign currency risk and to date has not undertaken
any foreign
58
currency hedges through the use of forward exchange contracts or options and
does not foresee doing so in the near future.
MANAGEMENT
Directors
The following table sets forth information as to our directors as of
December 2, 2005, together with their positions and ages.
Name of Age Position
Director
Christopher B. Wood, M.D. 59 Chairman of the Board and Chief
Executive Officer
Michael Kauffman, M.D. 42 Director
Thomas Scott Nelson, C.A. 66 Director
Steve A. Elms 41 Director
Andrew Schiff, M.D. 39 Director
Set forth below is the name, principal occupation for the last five years,
selected biographical information and the period of service as director of each
of the directors.
Christopher B. Wood, M.D. has served as our chairman of the board of directors
and chief executive officer since January 1999. From January 1997 to December
1998, Dr. Wood was chairman of the board of Eurobiotech, Inc., a Delaware
company. From March 1994 to January 1997, Dr. Wood was a specialist surgeon in
the National Health Service in the United Kingdom. From April 1979 to March
1991, Dr. Wood was a specialist surgeon at The Royal Postgraduate Medical
School, London, England. Dr. Wood holds an M.D. from the University of Wales
School of Medicine and the Fellowship of the Royal College of Surgeons of
Edinburgh.
Michael Kauffman M.D., Ph.D. was named a director in January 2004. Dr. Kauffman
is currently the president and chief executive officer of Predix
Pharmaceuticals. Prior to that he was the vice president, medicine, and
Proteasome Inhibitor (VELCADE(TM)) Program Leader at Millennium Pharmaceuticals
Inc. Prior to that, Dr. Kauffman held senior positions at Millennium Predictive
Medicine, Inc., as cofounder and vice president of Medicine, and at Biogen
Corporation. Dr. Kauffman received his M.D. and Ph.D. (molecular biology and
biochemistry) at Johns Hopkins and his postdoctoral training at Harvard
University. He is board certified in internal medicine, and comes with over 10
years of experience in drug discovery and development.
Thomas Scott Nelson, C.A. was named a director in May 1998. Mr. Nelson served as
our chief financial officer from May 1998 to September 2002. From 1996 to 1999,
Mr. Nelson served as the director of finance of the management board of the
Royal & Sun Alliance Insurance Group. From 1991 to 1996, Mr. Nelson served as
group finance director of the main board of Sun Alliance Insurance Group. He has
served as chairman of the United Kingdom insurance industry committee on
European regulatory, fiscal and accounting issues. He has also worked with
Deloitte in Paris and as a consultant with PA Consultants Management. Mr. Nelson
is a member of the Institute of Chartered Accountants of Scotland and a fellow
of the Institute of Cost and Management Accountants. Mr. Nelson holds a B.A.
degree from Cambridge University.
Steven A. Elms was named a director in May 2002. Mr. Elms serves as a managing
director of the Perseus-Soros Management, LLC, an affiliate of the Perseus-Soros
BioPharmaceutical Fund, LP. For five years prior to joining Perseus-Soros, Mr.
Elms was a principal in the Life Science Investment Banking group of Hambrecht &
Quist (now J.P. Morgan H&Q). Mr. Elms also serves as a director of Adams
Respiratory Therapeutics, Inc.
Andrew Schiff, M.D. was named a director in May 2002. Dr. Schiff currently
serves as a managing director of Perseus-Soros Management, LLC, an affiliate of
the Perseus-Soros Biopharmaceutical Fund, LP. Over the last 10 years, Schiff has
practiced internal medicine at The New York Presbyterian Hospital where he
maintains his position
59
as a Clinical Assistant Professor of Medicine. Dr. Schiff also serves as a
director of Adams Respiratory Therapeutics, Inc.
Committees of the Board of Directors
The Board of Directors currently has two standing committees; the Audit
Committee and the Compensation Committee.
All nominees are currently members of the Board of Directors. The Board
of Directors does not currently have a standing Nominating Committee. The Board
of Directors has adopted a director nomination policy whereby in connection with
the nomination of candidates to the Company's Board, director nominees will
either be selected or recommended for the Board's selection, by a majority of
the independent directors in accordance with NASDAQ Marketplace Rule
4350(c)(4)(A).
The Audit Committee is comprised of Messrs. Elms and Nelson and Drs.
Schiff and Kauffman; with Mr. Elms serving as Chairman of the Audit Committee.
All current and proposed Audit Committee members are independent, as
independence is defined in Rule 4200(a)(15) of the National Association of
Securities Dealers' listing standards. All members of the Audit Committee are
financially literate and the Board of Directors has determined that Mr. Nelson
(i) is an "audit committee financial expert" and (ii) is independent, as that
term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The
Audit Committee recommends that the Company's independent accountants audit our
financial statements, which includes an inspection of our books and accounts,
and reviews with such accountants the scope of their audit and their report
thereon, including any questions and recommendations that may arise relating to
such audit and report or our internal accounting and auditing system procedures.
The Board of Directors has adopted a written charter of the Audit Committee.
The Compensation Committee is comprised of Mr. Elms and Drs. Schiff and
Kauffman; with Dr. Kauffman serving as Chairman of the Compensation Committee.
The function of the Compensation Committee is to review and approve the
compensation of executive officers and establish targets and incentive awards
under our incentive compensation plans.
During the fiscal year ended June 30, 2005, (i) the Board of Directors
held 6 meetings; (ii) the Audit Committee held 11 meetings and (iii) the
compensation committee held 3 meetings. During the fiscal years ended June 30,
2005, each director attended at least 75% of the meetings of the Board of
Directors and meetings of committees on which he served.
Compensation of Directors
Our policy is that non-management directors are entitled to receive a
director's fee of $2,000 per meeting for attendance at meetings of the board of
directors that they attend in person, $1,000 per meeting for attendance at
meetings of committees the board of directors that they attend in person, and
$250 for each board or committee meeting they attend by teleconference, in
addition, they are reimbursed for actual expenses incurred in respect of such
attendance. We do not separately compensate employees for serving as directors.
We do not provide additional compensation for committee participation or special
assignments of the board of directors.
In connection with joining our board of directors, on January 20, 2004,
Dr. Michael Kauffman was granted an option to purchase 25,000 shares of our
common stock at an exercise price of $4.55 (the fair market value of our common
stock, on the date of the grant), 12,500 of which vest on January 20, 2005 with
the remaining 12,500 vesting on January 20, 2006.
EXECUTIVE AND SENIOR OFFICERS
Set forth below is the name, age, principal occupation for the last five
years, selected biographical information and the period of service as an
executive officer of each of the executive officers.
60
Christopher B. Wood, M.D., age 59, has served as our chairman of the board of
directors and chief executive officer since January 1999. From January 1997 to
December 1998, Dr. Wood was chairman of Eurobiotech, Inc., a Delaware company.
From March 1994 to January 1997, Dr. Wood was a specialist surgeon in the
National Health Service, United Kingdom. From April 1979 to March 1991, Dr. Wood
was a specialist surgeon at The Royal Postgraduate Medical School, London,
England. Dr. Wood holds an M.D. from the University of Wales School of Medicine
and the Fellowship of the Royal College of Surgeons of Edinburgh.
David P. Luci, C.P.A., Esq., age 39, has served as our chief financial officer,
general counsel and corporate secretary since July 2004, after serving as
director of finance, general counsel and corporate secretary since July 2002.
From September 1994 to July 2002, Mr. Luci served as a corporate associate at
Paul, Hastings, Janofsky & Walker LLP (New York office). Prior to that, Mr. Luci
served as a senior auditor at Ernst & Young LLP (New York office). Mr. Luci is a
certified public accountant. He holds a Bachelor of Science in Business
Administration with a concentration in accounting from Bucknell University and a
J.D. from Albany Law School of Union University.
Hugh S. Griffith, age 37, has served as Chief Operating Officer of Bioenvision,
Ltd., our wholly-owned sales and marketing subsidiary, since July 2004 after
serving as Commercial Director (Europe) since October 2002. Mr. Griffith served
as Executive Commercial Director of QuantaNova Ltd. from January 2002 to
September 2002. From October 1995 to December 2001, Mr. Griffith held several
senior commercial positions at Abbott Laboratories, including Senior Business
Unit Manager, Business Development Manager and Area Sales Manager. From April
1992 to October 1995 Mr. Griffith served with Parke-Davis, Warner Lambert. Mr.
Griffith holds a Masters of Business Administration from Cardiff Business
School, University of Wales; a Diploma of Marketing; and a Bachelor of Science
with Honours in Biology from the University of Stirling in Scotland.
Ian Abercrombie, age 44, has served as Sales Manager (Europe) since January
2003. Mr. Abercrombie joined us from his position of European Sales and
Marketing Director with Biolitec Pharma which he held from February of 2002
through January of 2003. From 1995 through January of 2002, Mr. Abercrombie was
with Johnson & Johnson. Mr. Abercrombie holds a Bachelor of Science in Marketing
from the University of Stirling in Scotland.
Kristen M. Dunker, Esq., age 31, has served as Vice President, Corporate
Compliance and Associate General Counsel since June 2004. From September 1999 to
June 2004, Ms. Dunker served as a corporate associate at Paul, Hastings,
Janofsky & Walker LLP. Ms. Dunker holds a Bachelor of Science in Business
Administration from Bucknell University and a J.D. from the University of Denver
College of Law.
Robert Sterling, age 42, has served as Vice President, Product Development since
July, 2004, after serving as Vice President, Veterinary Affairs since July 2002.
He is responsible for development of our anti-viral, anti-microbial and
veterinary businesses. Before joining us, Mr. Sterling worked for nine years at
Hoechst Roussel Vet, where he held various marketing and sales positions. Mr.
Sterling holds a B.S. degree from Penn State University.
Andrew Saunders, M.D., age 40, has served as Medical Director at Bioenvision
since May, 2005. Dr. Saunders joined us from Global Drug Development at
Hoffman-La-Roche where he was Clinical Science Leader for MabThera oncology with
global medical and scientific responsibility for the MabThera development
programme. From 2000 to 2002, Dr. Sanders held the position of European Clinical
Research Physician in oncology with Eli Lilly & Company. Dr. Saunders holds a
Degree in Medicine (1989) from Trinity College Dublin, Republic of Ireland
including primary degree qualifications as follows: Batchelor of Medicine;
Batchelor of Surgery; Batchelor of Obstetrics; Batchelor of Arts. Dr. Saunders
underwent post-graduate training in general medicine and haematology and his
Post-Graduate qualifications include: MRCP (Member of Royal College of United
Kingdom) in 1996; and MFPM (Member of Faculty Pharmaceutical Medicine) in 2000.
61
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid and awarded to all
individuals serving as (a) our chief executive officer, (b) each of our four
other most highly compensated executive officers (other than our chief executive
officer) at the end of our fiscal year ended June 30, 2005 whose total annual
salary and bonus exceeded $100,000 for these periods, and (c) up to two
additional individuals, if any, for whom disclosure would have been provided
pursuant to (b) except that the individual(s) were not serving as our executive
officers at the end of our fiscal year ended June 30, 2005 (each a "Named
Executive Officer"):
Summary Compensation Table
Annual compensation Long term compensation
Awards Payouts
Securities All
Name & underlying LTIP other
Principal Position Year Salary Bonus Other options/SARs payout compensation
------------------ ---- ------ ----- ----- ------------------ ------------
$ $ $ $ $
Christopher B. Wood, MD,
Chairman and Chief Executive
Officer 2005 300,000 129,000 30,000(1) 195,000(2)
2004 225,000 - - - - -
2003 225,000 - - 500,000(3) - -
David P. Luci, Esq., Chief
Financial Officer, General
Counsel and Corporate Secretary 2005 275,000 86,000(4) - 160,000
2004 220,000 20,000(5) - 185,000(6)
2003 205,200 25,000(7) - 500,000(8) - -
Hugh S. Griffith, Chief
Operating Officer (Europe) 2005 250,000 86,000 46,090(9) 160,000
2004 216,000 - 36,400 175,000(10) - -
2003 216,000 20,000 14,400 300,000(11) - -
Andrew Saunders, MD 2005 231,250(12) - 50,000(13)
2004 - - - - - -
2003 - - - - - -
Kristen M. Dunker, Esq. 2005 170,000 50,000 36,250(14)
2004 135,000 - - 140,000(15) - -
2003 - - - - - -
--------------------------
(1) Dr. Wood receives a Company sponsored contribution to his pension plan
in the amount of $30,000 per annum.
(2) On January 6, 2005, Dr. Wood was granted options to purchase 195,000
shares of our common stock at $8.17 per share. Of these options,
options to purchase 48,750 shares of our common stock vested
immediately and options to purchase 48,750 shares of our common stock
vest and become exercisable, subject to certain circumstances, on each
of the first, second and third anniversaries of the grant date.
(3) On December 31, 2002, Dr. Wood was granted options to purchase 500,000
shares of our common stock at $1.45 per share. Of these options,
options to purchase 166,666 shares of our common stock vest and become
exercisable, subject to certain circumstances, on each of the first,
second and third anniversaries of the grant date.
(4) Excludes $872,000 which constitutes the value of the equity component
of Mr. Luci's annual bonus (options to purchase 160,000 shares of our
common stock granted on January 6, 2005).
(5) Excludes $370,000 which constitutes the value of the equity component
of Mr. Luci's annual bonus (options to purchase 185,000 shares of our
common stock granted on January 20, 2004).
(6) On January 20, 2004, Mr. Luci was granted options to purchase 185,000
shares of our common stock at a then-current fair market value. Of
these options, options to purchase 61,666 shares of our common stock
62
vest and become exercisable, subject to certain circumstances, on the
first anniversary of the grant date and options to purchase 61,667
shares of our common stock vest and become exercisable, on each of the
second and third anniversaries of the grant date.
(7) The annual bonus of $57,000 was prorated for the portion of calendar
year 2002 within which Mr. Luci was employed by us.
(8) On July 22, 2002, Mr. Luci was granted options to purchase 380,000
shares of our common stock. On March 31, 2003, in connection with the
execution of an employment agreement between us and Mr. Luci, these
options were cancelled and we issued options to purchase 500,000
shares of common stock at $0.735 per share. Of these options, options
to purchase 170,000 shares of our common stock are immediately
exercisable and, subject to certain circumstances, options to purchase
110,000 shares of common stock vest and become exercisable on each of
the first, second and third anniversaries of March 31, 2003, the grant
date.
(9) Mr. Griffith receives a Company sponsored contribution to his pension
plan of $25,000 per annum and is reimbursed for his car lease in the
amount of $21,090 per annum.
(10) On January 20, 2004, Mr. Griffith was granted options to purchase
175,000 shares of our common stock at $4.05 per share. Of these
options, options to purchase 58,333 shares of our common stock vest
and become exercisable, subject to certain circumstances, on each of
the first, second and third anniversaries of the grant date.
(11) On October 22, 2003, Mr. Griffith was granted options to purchase
300,000 shares of our common stock at $1.45 per share. Of these
options, options to purchase 100,000 shares of our common stock vest
and become exercisable, subject to certain circumstances, on each of
the first, second and third anniversaries of October 22, 2002, the
grant date.
(12) Dr. Saunders' base salary is 125,000 GBP, which converts to $231,250
at an exchange rate of 1.85.
(13) On March 16, 2005, Dr. Saunders was granted options to purchase 50,000
shares of our common stock at $5.44 per share. Of these options,
options to purchase 12,500 shares of our common stock vest and become
exercisable, subject to certain circumstances, on June 30, 2005 and
options to purchase 12,500 shares of our common stock vest and become
exercisable, subject to certain circumstances, on each of the first,
second and third anniversaries of the grant date.
(14) On January 6, 2005, Ms. Dunker was granted options to purchase 36,250
shares of our common stock at $8.17 per share. Of these options,
options to purchase 9,063 shares of our common stock vested
immediately and options to purchase 9,063 shares of our common stock
vest and become exercisable, subject to certain circumstances, on each
of the first, second and third anniversaries of the grant date.
(15) On June 22, 2004, Ms. Dunker was granted options to purchase 140,000
shares of our common stock at $8.25 per share. Of these options,
options to purchase 30,000 shares of our common stock vested
immediately and options to purchase 55,000 shares of our common stock
vest and become exercisable on each of the first and second
anniversaries of the grant date.
63
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with certain of our principal
executive officers. Pursuant to these agreements, our executive officers agree
to devote all or a substantial portion of their business and professional time
efforts to our business as executive officers. The employment agreements provide
for certain compensation packages, which include bonuses and other incentive
compensation. The agreements also contain covenants restricting the employees
from competing with us and our business and prohibiting them from disclosing
confidential information about us and our business.
On September 1, 1999, we entered into an employment agreement with
Christopher B. Wood, M.D. under which he serves as our chairman and Chief
Executive Officer. The initial term of Dr. Wood's employment agreement is two
years with automatic one-year extensions thereafter unless either party gives
written notice to the contrary. On December 31, 2002, we entered into a new
employment agreement with Dr. Wood, under which he continues to serve as our
chairman and Chief Executive Officer. Under this contract, the term is one year,
with automatic one-year extensions thereafter unless either party provides
written notice to the contrary. Dr. Wood's new employment agreement provides for
an initial base salary of $225,000, a bonus as determined by the board of
directors, health insurance and other benefits currently or in the future
provided to our key employees. If Dr. Wood's employment is terminated other than
for cause or if he resigns for good reason or if a change of control occurs, he
will receive a lump sum payment in an amount equal to his then current annual
base salary and any and all unvested options will vest and immediately become
exercisable.
On October 23, 2002, we entered into an employment agreement with Hugh
S. Griffith, pursuant to which he agrees to serve as our Commercial Director
(Europe). The initial term of Mr. Griffith's employment agreement is one-year,
with automatic six month extensions thereafter unless either party provides
written notice to the contrary. If Mr. Griffith's employment is terminated other
than for cause or if he resigns for good reason or if a change of control
occurs, he will receive a lump sum payment in an amount equal to 0.5 multiplied
by the sum of his then current annual base salary plus a payment equal to six
(6) months of his then current base salary in complete satisfaction of our
obligation to provide no less than six (6) months prior written notice as set
forth in the employment agreement.
On January 6, 2003, we entered into an employment agreement with Ian
Abercrombie, pursuant to which he agrees to serve as our Sales Manager (Europe).
The initial term of Mr. Abercrombie's employment agreement is one-year, with
automatic six month extensions thereafter unless either party provides written
notice to the contrary. If Mr. Abercrombie's employment is terminated other than
for cause or if he resigns for good reason or if a change of control occurs, he
will receive a payment equal to six (6) months of his then current base salary
in complete satisfaction of our obligation to provide no less than six (6)
months prior written notice as set forth in the employment agreement.
On March 31, 2003, we entered into an employment agreement with David P.
Luci, pursuant to which he serves as our Director of Finance, General Counsel
and Corporate Secretary. The initial term of Mr. Luci's employment agreement is
one-year, with automatic one-year extensions thereafter unless either party
provides written notice to the contrary. If Mr. Luci's employment is terminated
other than for cause or if he resigns for good reason or if a change of control
occurs, he will receive a lump sum payment in an amount equal to 1.5 multiplied
by the sum of (i) his then current annual base salary plus (ii) his then average
annual bonus for the preceding two years and any and all unvested options will
vest and immediately become exercisable.
64
STOCK OPTIONS AND LONG TERM INCENTIVE PLANS
Option/SAR Grants in Last Fiscal Year
The following table sets forth information concerning option/SAR grants
in our fiscal year ended June 30, 2005 to each Named Executive Officer:
----------------------------------------------------------------------------------- ----------------------------------
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term(1)
------------------------- ------------ ----------------- ------------- ------------ ------------------ ---------------
Name Number of Percent of Exercise or Expiration 5%($) 10% ($)
securities total base price Date
underlying options/SARs ($/share)
options/SARs granted to
granted (#) employees in
fiscal year
------------------------- ------------ ----------------- ------------- ------------ ------------------ ---------------
Christopher B. Wood, MD 195,000 24.63% $8.17 1/6/15(2) 664,950 1,920,750
------------------------- ------------ ----------------- ------------- ------------ ------------------ ---------------
David P. Luci, Esq. 160,000 20.2% $8.17 1/6/15(2) 545,600 1,576,000
------------------------- ------------ ----------------- ------------- ------------ ------------------ ---------------
Hugh S. Griffith 160,000 20.2% $8.17 1/6/15(2) 545,600 1,576,000
------------------------- ------------ ----------------- ------------- ------------ ------------------ ---------------
Andrew Saunders, MD 50,000 6.3% $5.44 3/16/15(3) 313,000 647,500
------------------------- ------------ ----------------- ------------- ------------ ------------------ ---------------
Kristen M. Dunker, Esq. 36,250 4.6% $8.17 1/6/15(2) 123,613 357,063
------------------------- ------------ ----------------- ------------- ------------ ------------------ ---------------
(1) The dollar amounts under these columns are the result of calculations
at rates set by the Securities and Exchange Commission and, therefore,
are not intended to forecast possible future appreciation, if any, in
the price of the underlying common stock. The potential realizable
values are calculated using the closing price of $7.28 per share of
our common stock as quoted on the Nasdaq National Market on the last
day of the fiscal year, or June 30, 2005, and assuming that the market
price appreciates from this price at the indicated rate for the entire
term of each option and that each option is exercised and sold on the
last day of its term at the assumed appreciated price.
(2) Options vest 25% on the grant date and 25% on each of the first,
second and third anniversaries of the grant date.
(3) Options vest 25% on June 30, 2005 and 25% on each of the first, second
and third anniversaries of the grant date, March 16, 2005.
During our fiscal year ended June 30, 2005, Mr. Luci exercised options
to purchase 390,000 shares of our common stock and paid the Company the
aggregate exercise price of $286,650. There were no other options exercised in
our fiscal year ended June 30, 2005 by the named executive officers.
65
Option Exercises and Year-End Option Values
The following table provides information regarding the exercise of stock
options during the fiscal year ended June 30, 2005 and the number and value of
unexercised options to purchase our common stock held as of June 30, 2005 by our
named executive officers. As permitted by the rules of the Securities and
Exchange Commission, we have calculated the value of the unexercised
in-the-money options at fiscal year end on the basis of the closing price of
$7.28 per share of our common stock as quoted on the Nasdaq National Market on
the last day of the fiscal year, or June 30, 2005, less the applicable exercise
price multiplied by the number of shares which may be acquired on exercise. We
have calculated the value realized of exercised options based on the difference
between the per share option exercise price and the fair market value per share
of our common stock on the date of exercise, multiplied by the number of shares
for which the option was exercised.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End 2005
Option/SAR Values
----------------------------- ------------- ----------- ----------------------------- ----------------------------
Name Shares Value Number of Securities Value of Unexercised
acquired on Realized underlying unexercised In-the-Money Options/SARs
exercise (#) ($) options/SARs at Fiscal Year at Fiscal Year End(1) ($)
End (#)
----------------------------- ------------- ----------- ------------- --------------- ------------- --------------
Exercisable Unexercisable Exercisable Unexercisable
----------------------------- ------------- ----------- ------------- --------------- ------------- --------------
Christopher B. Wood, MD 0 0 1,882,083 312,917 $10,988,331 $971,669
----------------------------- ------------- ----------- ------------- --------------- ------------- --------------
David P. Luci, Esq. 33,946 $344,552 101,666.67 353,333.33 $199,183 $1,118,317
246,054 $2,010,261
110,000 $701,800
----------------------------- ------------- ----------- ------------- --------------- ------------- --------------
Hugh S. Griffith 0 0 298,333.33 336,666.67 $1,354,417 $1,121,333
----------------------------- ------------- ----------- ------------- --------------- ------------- --------------
Andrew Saunders, MD 0 0 12,500 37,500 $23,000 $69,000
----------------------------- ------------- ----------- ------------- --------------- ------------- --------------
Kristen M. Dunker, Esq. 0 0 94,062.5 82,187.5 0 0
----------------------------- ------------- ----------- ------------- --------------- ------------- --------------
Ten Year Option/SAR Repricings
-------------------------- ---------- ------------- ------------- ------------ ---------- ----------------------
Name Date Number of Market Exercise New Length of Original
Securities Price of Price at Exercise Option Term
underlying Stock at time of Price remaining at date of
options/SARs time of Repricing ($) repricing or
repriced or Repricing or amendment
amended (#) or Amendment
Amendment ($)
($)
-------------------------- ---------- ------------- ------------- ------------ ---------- ----------------------
David P. Luci, Esq., 3/31/03 380,000 $0.735 $1.95 $0.735 9.25 years
Chief Financial Officer,
General Counsel,
Corporate Secretary
-------------------------- ---------- ------------- ------------- ------------ ---------- ----------------------
66
Equity Compensation Plan Information
The following table provides information about the securities authorized
for issuance under the Company's equity compensation plans as of June 30, 2005:
Number of Number of securities
securities to be remaining available for
issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected in
and rights and rights column (a))
Plan category (a) (b) (c)
----------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 2,463,167 $4.56 1,543,500
Equity compensation plans
not approved by security
holders(1) -- -- --
Total 2,463,167 $4.56 1,543,500
(1) We have no equity compensation plans not approved by security holders.
The Board of Directors adopted, and our stockholders approved our 2003
Stock Incentive Plan at the Annual Meeting held in January of 2004. The plan was
adopted to recognize the contributions made by our employees, officers,
consultants, and directors, to provide those individuals with additional
incentive to devote themselves to our future success and to improve our ability
to attract, retain and motivate individuals upon whom our growth and financial
success depends. There are 4,500,000 shares reserved for grants of options under
the plan and at June 30, 2005, 2,956,500 of these options had been issued.
Stock Option Plan
Our Board of Directors has adopted, and our stockholders have approved
our 2003 Stock Incentive Plan, as amended. The plan was adopted to recognize the
contributions made by our employees, officers, consultants, and directors, to
provide those individuals with additional incentive to devote themselves to our
future success and to improve our ability to attract, retain and motivate
individuals upon whom our growth and financial success depends.
The key provisions of the plan are as follows:
Eligibility and Administration.
The plan authorizes the Board of Directors or the compensation committee
(the "Administrator"), to (i)select the participants who are to be granted
options, restricted shares or performance units, (ii)determine the number of
shares of Common Stock to be granted to each participant, (iii)designate
options, to the extent the award consists of options, as incentive stock options
or nonstatutory stock options, (iv)determine the vesting schedule and
performance criteria, if any, for restricted shares and performance units and
(v)determine to what extent the awards may be transferable. As of the date
hereof, there are approximately 7 employees who are currently eligible to
participate in the plan under the Company's policies. All directors and
consultants are currently eligible to participate in the plan. The
Administrator's interpretations and construction of the plan are final and
binding on the Company.
Shares Available for Issuance Under the Plan
The stock subject to options granted under the plan are shares of the
Company's authorized but unissued or reacquired shares of Common Stock. On
December 7, 2005, the closing price of the common stock on the Nasdaq
67
National Market of the Common Stock was $5.87 per share. There are 4,500,000
shares reserved for grants of options under the plan. On the same date, there
were 40,760,762 shares of Common Stock outstanding.
Grant, Exercise and other Terms of Awards.
Options issued under the plan are designated as either incentive stock
options or nonstatutory stock options. Incentive stock options are options
meeting the requirements of Section 422 of the Code, and nonstatutory options
are options not intended to so qualify.
The exercise price of options granted under the plan may not be less
than 100% of the fair market value of the Common Stock of the Company (as
defined by the plan) on the date of the grant. With respect to any participant
who owns stock representing more than 10% of the voting rights of the
outstanding Common Stock of the Company, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value of the
Common Stock on the grant date, and the maximum term of any such incentive stock
option must not exceed five years.
Options, restricted shares and performance units are evidenced by
written award agreements in a form approved by the Administrator from time to
time and no award is effective until the applicable award agreement has been
executed by both parties thereto. Options granted under the plan may become
exercisable in cumulative increments over a period of months or years, or
otherwise, as determined by the Administrator. The purchase price of options
shall be paid in cash; provided, however, that if the applicable award agreement
so provides, or the Administrator, in its sole discretion otherwise approves
thereof, the purchase price may be paid in shares of Common Stock having a fair
market value on the exercise date equal to the exercise price or in any
combination of cash and shares of Common Stock, as long as the sum of the cash
so paid and the fair market value of the shares so surrendered equals the
aggregate purchase price. In addition, the Administrator may permit deferred
compensation elections by certain directors and executive officers. The award
agreement evidencing the restricted shares and/or performance units shall set
forth the terms upon which the Common Stock subject to any awards or the
achievement of any cash bonus may be earned.
No options granted under the plan are exercisable after the expiration
of ten years (or less in the discretion of the Administrator) from the date of
the grant, and no incentive stock options granted under the Amended Award Plan
to a participant who owns more than ten percent of the total combined voting
power of all classes of outstanding stock of the Company shall be exercisable
after the expiration of five years (or less, in the discretion of the
Administrator) from the date of the grant. The aggregate fair market value (as
of the respective date or dates of grant) of the shares of Common Stock
underlying the incentive stock options that are exercisable for the first time
by a participant during any calendar year under the plan and all other similar
plans maintained by the Company may not exceed $100,000. If a participant ceases
to be an employee of the Company for any reason other than his or her death,
Disability or Retirement (as such terms are defined in the plan), such
participant shall have the right, subject to certain restrictions, to exercise
that option at any time within ninety days (or less, in the discretion of the
Administrator) after cessation of employment, but, except as otherwise provided
in the applicable award agreement, only to the extent that, at the date of
cessation of employee, the participant's right to exercise such option had
vested and had not been previously exercised. The Administrator, in its sole
discretion, may provide that the option shall cease to be exercisable on the
date of such cessation if such cessation arises by reason of termination for
Cause (as such term is defined in the Amended Award Plan) or if the participant
becomes an employee, director or consultant of an entity that the Administrator
determines is in direct competition with the Company.
In the event a participant dies before such participant has fully
exercised his or her option, then the option may be exercised at any time within
twelve months after the participant's death by the executor or administrator of
his or her estate or by any person who has acquired the option directly from the
participant by bequest or inheritance, but except as otherwise provided on the
applicable award agreement, only to the extent that, at the date of death, the
participant's right to exercise such option had vested pursuant to the terms of
the applicable award agreement and had not been forfeited or previously
exercised.
In the event a participant ceases to be an employee of the Company by
reason of Disability, such participant shall have the right, subject to certain
restrictions, to exercise the option at any time within twelve months (or such
shorter period as the Administrator may determine) after such cessation of
employment, but only to
68
the extent that, at the date of cessation of employment, the participant's right
to exercise such option had previously vested pursuant to the terms of the
applicable award agreement and had not previously been exercised.
In the event a participant ceases to be an employee of the Company by
reason of Retirement, such participant shall have the right, subject to certain
restrictions, to exercise the option at any time within ninety days (or such
longer or shorter period as the Administrator may determine) after cessation of
employment, but only to the extent that, at the date of cessation of employment,
the participant's right to exercise such option had vested pursuant to the terms
of the applicable award agreement and had not previously been exercised.
Adjustment of Awards Upon Certain Events.
If the Company merges with another corporation and the Company is the
surviving corporation in such merger and under the terms of such merger the
shares of Common Stock outstanding immediately prior to the merger remain
outstanding and unchanged, each outstanding award shall continue to apply to the
shares subject thereto and will also pertain and apply to any additional
securities and other property, if any, to which a holder of the number of shares
subject to the option would have been entitled as a result of the merger.
In the event all or substantially all of the assets of the Company are
sold, the Company engages in a merger where the Company does not survive or the
Company is consolidated with another corporation, each participant shall receive
immediately before the effective date of such sale, merger or consolidation
restricted shares and the value of any performance units to which the
participant is then entitled (regardless of any vesting condition) and each
outstanding option will become exercisable (without regard to the vesting
provisions thereof) for a period of at least 30 days ending five days prior to
the effective date of the transaction. Notwithstanding the foregoing, the
surviving corporation may, in its sole discretion, (i) (a) grant to participants
with options, options to purchase shares of the surviving corporation upon
substantially the same terms as the options granted under the plan, (b) tender
to all participants with restricted shares, an award of restricted shares of the
surviving or acquiring corporation, and (c) tender to all participants with
performance units, an award of performance units of the surviving or acquiring
corporation, or (ii) (a) permit participants with restricted shares to receive
unrestricted shares immediately prior to the effective date of any transaction,
(b) permit participants with performance units to receive cash with respect to
the value of any performance units immediately before the effective date of the
transaction and (c) provide participants with options the choice of exercising
the option prior to the consummation of the transaction or receiving a
replacement option.
Notwithstanding anything to the contrary and except as otherwise
expressly provided in the applicable award agreement, the vesting or similar
installment provisions relating to the exercisability of any award, option or
replacement option tendered as described in the previous sentence shall be
accelerated, and the participant with restricted shares or performance units
shall become fully vested, and the participant with options shall have the
right, for a period of at least 30 days, to exercise such options; provided that
such accelerations of vesting and exercisability shall occur only in the event
that the participant's employment with or services for the Company should
terminate within two years following a Change of Control (as defined in the
plan), unless such employment or services are terminated by the Company for
Cause (as defined in the plan) or by the participant voluntarily without Good
Reason (as defined in the plan), or such employment or services are terminated
due to the death or Disability of the participant. Notwithstanding the
foregoing, no incentive stock option shall become exercisable pursuant to the
foregoing without the participant's consent, if the result would be to cause
such option not to be treated as an incentive stock option.
The number of shares of Common Stock covered by the plan, the number of
shares of Common Stock covered by each outstanding option, restricted share and
performance unit and the exercise price of any options shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or consolidation of such shares or a stock
split or the payment of a stock dividend (but only of Common Stock) or any other
increase or decrease in the number of issued shares effected without receipt of
consideration by the Company.
69
Transfer of Awards.
Unless an award is designated transferable by the Administrator upon
grant, during the lifetime of the participant who has been granted an award, the
award shall be shall not be assignable or transferable. No incentive stock
option may be designated as transferable. In the event of the participant's
death, any nontransferable award shall be transferable by the participant's will
or the laws of descent and distribution.
Amendment and Termination.
The plan will continue in effect until terminated by the Board of
Directors or until expiration of the plan on November 17, 2013. The Board may
suspend or discontinue the plan or revise or amend it.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 2005, the compensation committee
of the board of directors was comprised of Mr. Elms and Drs. Schiff and
Kauffman; with Dr. Kauffman serving as chairman of the Compensation Committee.
None of the committee's members was employed by us as an officer or employee
during the fiscal year ended June 30, 2005. No committee member had any
interlocking relationships requiring disclosure under applicable rules and
regulations.
For a description of certain relationships and transactions with members
of the board of directors or their affiliates, see "--Certain Relationships and
Related Transactions" beginning on page 73.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of common stock, as of December 7, 2005 by (i) each person
whom we know to beneficially own 5% or more of the common stock, (ii) each of
our directors, (iii) each person listed on the Summary Compensation Table set
forth under "Executive Compensation" and (iv) all of our directors and executive
officers. The number of shares of common stock beneficially owned by each
stockholder is determined in accordance with the rules of the Commission and
does not necessarily indicate beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock over
which the stockholder exercises sole or shared voting or investment power. The
percentage ownership of the common stock, however, is based on the assumption,
expressly required by the rules of the Commission, that only the person or
entity whose ownership is being reported has converted or exercised common stock
equivalents into shares of common stock; that is, shares underlying common stock
equivalents are not included in calculations in the table below for any other
purpose, including for the purpose of calculating the number of shares
outstanding generally. Except as otherwise noted below, the address for each
person listed on the table is c/o Bioenvision, Inc., 345 Park Avenue, 41st
Floor, New York, New York 10154.
BENEFICIAL OWNERSHIP CURRENT PERCENTAGE OF
NAME OF STOCK CLASS (1)
Perseus-Soros Biopharmaceutical
Fund, LP (2)
888 Seventh Avenue, 30th Floor
New York, New York 10106.................. 7,950,053 16.48%
SCO Capital Partners LLC (3)
1285 Avenue of the Americas, 35th Floor
New York, New York 10019.................. 7,670,236 17.83%
Cumberland Associates LLC(4)
1114 Avenue of the Americas
New York, NY 10036........................ 2,163,406 5.3%
Christopher B. Wood, M.D. (5)............. 4,136,987 9.67%
David P. Luci (6) ...................... 470,720 *
Hugh Griffith (7) ...................... 298,333 *
Thomas Scott Nelson....................... 341,787 *
Andrew Saunders(8)........................ 12,500 *
Kristen Dunker(9) ........................ 94,063 *
Steven A. Elms
888 Seventh Avenue, 29th Floor
New York, New York 10106.................. 0 *
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BENEFICIAL OWNERSHIP CURRENT PERCENTAGE OF
NAME OF STOCK CLASS (1)
Andrew N. Schiff, M.D.
888 Seventh Avenue, 29th Floor
New York, New York 10106.................. 0 *
Michael Kauffman M.D., Ph.D(10)........... 14,375 *
All Executive Officers and Directors as a
group (11) 5,358,765 12.42%
------------
* Represents holdings of less than one percent (1%).
(1) Based on a total of 40,760,762 shares of common stock outstanding as
of December 7, 2005.
(2) Includes 2,250,000 shares of Series A Preferred Stock currently
convertible into 4,500,000 shares of common stock and a warrant to
purchase 3,000,000 shares of common stock exercisable at $2.00 per
share for five years from May 8, 2002. Also includes 375,044 common
shares and a warrant to purchase 75,009 shares of common stock
exercisable at $7.50 for five years from May 13, 2004. Perseus-Soros
Partners, LLC is the general partner of the Perseus-Soros
BioPharmaceutical Fund, LP. Perseus BioTech Fund Partners, LLC and SFM
Participation, L.P. are the managing members of Perseus-Soros
Partners, LLC. Perseuspur, LLC is the managing member of Perseus
BioTech Fund Partners, LLC. Frank Pearl is the sole member of
Perseuspur, LLC and in such capacity may be deemed a beneficial owner
of securities held for the account of the Perseus-Soros
BioPharmaceutical Fund, LP. SFM AH, LLC is the general partner of SFM
Participation, L.P. The sole managing member of SFM AH, LLC is Soros
Fund Management LLC. George Soros is the Chairman of Soros Fund
Management LLC and in such capacity may be deemed a beneficial owner
of securities held for the account of the Perseus-Soros
BioPharmaceutical Fund, LP.
(3) Includes a warrant to purchase 1,200,000 shares of common stock
exercisable at $1.25 per share for five years from November 16, 2001
issued to SCO Capital, LLC; a warrant to purchase 688,333 shares of
common stock exercisable at $1.50 per share for five years from May 8,
2002 issued to SCO Capital, LLC; a warrant to purchase 100,000 shares
of common stock exercisable at $1.25 per share for five years from
November 16, 2001 issued to SCO Securities, LLC; a warrant to purchase
150,000 shares of common stock exercisable at $1.25 per share for five
years from November 16, 2001 held by the Sophie C. Rouhandeh Trust;
and a warrant to purchase 150,000 shares of common stock at $1.25 per
share for five years from November 16, 2001 held by the Chloe H.
Rouhandeh Trust. Steven H. Rouhandeh, in his capacity as President of
SCO Capital Partners, LLC and trustee of the trusts, has investment
power and voting power with respect to these shares, but disclaims any
beneficial ownership thereof. Excludes a warrant to purchase 70,000
shares of common stock exercisable at $1.50 per share for five years
from May 8, 2002 which were originally held by SCO Financial Group,
LLC, but transferred to (i) Daniel DiPietro (50,000), (ii) Jeremy
Kaplan (10,000), and (iii) Joshua Golumb (10,000). SCO Financial
Group, LLC served as a financial advisor to us through May 2004 and
SCO Capital Partners, LLC extended a $1 million secured credit
facility to us in November 2001. SCO Securities, LLC, a related
entity, served as placement agent to us in connection with our May
2002 and March and May 2004 financings. As placement agent in
connection with the March and May 2004 financing, SCO Securities, LLC
received a warrant to purchase 204,452 shares of common stock
exercisable at $6.25 per share for five years from March 22, 2004 and
a warrant to purchase 55,838 shares of common stock exercisable at
$6.25 per share for five years from May 13, 2004.
(4) Based upon it Schedule 13G filed on July 14, 2005, Cumberland
Associates owns 2,163,406 shares of common stock.
72
(5) Dr. Wood is our chairman and Chief Executive Officer. Excludes 318,750
shares of common stock owned by Julie Wood, Dr. Wood's spouse, as to
which Dr. Wood disclaims any beneficial interest. Includes options to
acquire 1,500,000 shares of common stock which are exercisable at
$1.25 per share, options to acquire 333,333 shares of common stock
which are exercisable at $1.45 per share and options to acquire and
options to acquire 48,750 shares of our common stock which are
exercisable at $8.17 per share.
(6) Includes options to acquire 61,666 shares of common stock which are
exercisable at $4.05 per share and 40,000 options which are
exercisable at $8.17 per share.
(7) Includes options to acquire 200,000 shares of the common stock which
are exercisable at $1.45 per share, options to acquire 58,333 shares
of common stock at $4.05 per share and options to acquire 40,000
shares of common stock at $8.17 per share.
(8) Includes options to acquire 12,500 shares of common stock at $5.44 per
share.
(9) Includes options to acquire 85,000 shares of common stock at $8.25 per
share and 9,063 shares of common stock at $8.17 per share.
(10) Includes options to acquire 12,500 shares of common stock at $4.55 and
options to acquire 1,875 shares of common stock at $8.17 per share.
(11) Includes options to acquire 2,403,020 shares of common stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002, we completed a private placement pursuant to which we
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 March and May of 2004, we completed a
private placement pursuant to which we issued an aggregate of 2,602,898 shares
of our common stock and warrants to purchase an aggregate of 780,870 shares of
common stock. An affiliate of SCO Capital Partners LLC, one of our stockholders,
served as our financial advisor in connection with these financings and earned a
placement fee of approximately $1,200,000 in connection with the May 2002
private placement and warrants to purchase 260,291 shares of common stock for
$6.25 per share for the March and May 2004 financings.
73
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time
to time by the selling stockholders. The term "selling stockholders" includes
pledgees, donees, transferees or other successors in interest selling shares
received after the date of this prospectus from the selling stockholders as a
pledge, gift, partnership distribution or other non-sale related transfer. The
number of shares beneficially owned by each selling stockholder will decrease as
and when it effects any such transfers. The plan of distribution for the selling
stockholders' shares sold hereunder will otherwise remain unchanged, except that
the transferees, pledgees, donees or other successors will be selling
stockholders hereunder. To the extent required, we may amend and/or supplement
this prospectus from time to time to describe a specific plan of distribution.
The selling stockholders will act independently of us in making
decisions with respect to the timing, manner and size of each sale. The selling
stockholders may offer their shares from time to time pursuant to one or more of
the following methods:
o on Nasdaq or on any other market on which our common stock may
from time to time be trading;
o one or more block trades in which the broker or dealer so
engaged will attempt to sell the shares of common stock as agent
but may position and resell a portion of the block as principal
to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by the
broker or dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
o in public or privately-negotiated transactions;
o through the writing of options on the shares;
o through underwriters, brokers or dealers (who may act as agents
or principals) or directly to one or more purchasers;
o an exchange distribution in accordance with the rules of an
exchange;
o through agents; or
o through market sales, both long or short, to the extent
permitted under the federal securities laws; or in any
combination of these methods.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o any other prices as the selling stockholder may determine from
time to time.
In connection with distributions of the shares or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the shares in
the course of hedging the positions they assume;
74
o sell the shares short and redeliver the shares to close out such
short positions;
o enter into option or other transactions with broker-dealers or
other financial institutions which require the delivery to them
of shares offered by this prospectus, which they may in turn
resell; and
o pledge shares to a broker-dealer or other financial institution,
which, upon a default, they may in turn resell.
In addition to the foregoing methods, the selling stockholders may offer
their shares from time to time in transactions involving principals or brokers
not otherwise contemplated above, in a combination of such methods as described
above or any other lawful methods.
Sales through brokers may be made by any method of trading authorized by
any stock exchange or market on which the shares may be listed or quoted,
including block trading in negotiated transactions. Without limiting the
foregoing, such brokers may act as dealers by purchasing any or all of the
shares covered by this prospectus, either as agents for others or as principals
for their own accounts, and reselling such shares pursuant to this prospectus. A
selling stockholder may effect such transactions directly, or indirectly through
underwriters, broker- dealers or agents acting on their behalf. In effecting
sales, brokers and dealers engaged by the selling stockholders may arrange for
other brokers or dealers to participate.
Upon our being notified by the selling stockholders that any material
arrangement has been entered into with a broker-dealer for the sale of shares
offered hereby through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
o the names of the selling stockholder(s) and of the participating
broker-dealer(s), identifying them as underwriters, as required;
o the number of shares involved;
o the price at which such shares were sold;
o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable; and
o other facts material to the transaction.
The shares may also be sold pursuant to Rule 144 under the securities
act, which permits limited resale of shares purchased in a private placement
subject to the satisfaction of certain conditions, including, among other
things, the availability of certain current public information concerning the
issuer, the resale occurring following the required holding period under 144 and
the number of shares during any three-month period not exceeding certain
limitations. The selling stockholders have the sole and absolute discretion not
to accept any purchase offer or make any sale of their shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom these broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that the selling stockholders will attempt to
sell shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered by this
prospectus will be issued to, or sold by, the selling stockholders if they do
not exercise or convert the common stock
75
equivalents that they own. The selling stockholders and any brokers, dealers or
agents, upon effecting the sale of any of the shares offered by this prospectus,
may be deemed "underwriters" as that term is defined under the securities act or
the exchange act, or the rules and regulations under those acts. In that event,
any commissions received by the broker-dealers or agents and any profit on the
resale of the shares of common stock purchased by them may be deemed to be
underwriting commissions or discounts under the securities act.
The selling stockholders, alternatively, may sell all or any part of the
shares offered by this prospectus through an underwriter. To our knowledge, none
of the selling stockholders have entered into any agreement with a prospective
underwriter and there can be no assurance that any such agreement will be
entered into. If the selling stockholders enter into such an agreement or
agreements, then we will set forth in a post-effective amendment to this
prospectus the following information:
o the number of shares being offered;
o the terms of the offering, including the name of any selling
stockholder, underwriter, broker, dealer or agent;
o the purchase price paid by any underwriter;
o any discount, commission and other underwriter compensation;
o any discount, commission or concession allowed or reallowed or
paid to any dealer;
o the proposed selling price to the public; and
o other facts material to the transaction.
We will also file such agreement or agreements. In addition, if we are
notified by the selling stockholders that a donee, pledgee, transferee or other
successor-in-interest intends to sell more than 500 shares, a supplement to this
prospectus will be filed.
The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
exchange act and the rules and regulations under the exchange act, including,
without limitation, Regulation M. These provisions may restrict certain
activities of, and limit the timing of purchases and sales of any of the shares
by, the selling stockholders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to the same securities for a specified period of time prior to the
commencement of the distribution, subject to specified exceptions or exemptions.
All of these limitations may affect the marketability of the shares.
We have agreed to pay all costs and expenses incurred in connection with
the registration of the shares offered by this prospectus, except that the
selling stockholder will be responsible for all selling commissions, transfer
taxes and related charges in connection with the offer and sale of the shares
and the fees of the selling stockholder's counsel.
We have agreed with the selling stockholders to keep the registration
statement of which this prospectus forms a part continuously effective until the
earlier of the date that the shares covered by this prospectus may be sold
pursuant to Rule 144(k) of the securities act and the date that all of the
shares registered for sale under this prospectus have been sold.
We have agreed to indemnify the selling stockholders, or their
respective transferees or assignees, against certain liabilities, including
liabilities under the securities act, or to contribute to payments that the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of those liabilities.
76
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES STOCKHOLDERS
The following is a summary of the material U.S. federal income tax
considerations with respect to the ownership and disposition of our common stock
by a non-U.S. holder (as defined below) as of the date hereof. This summary
deals only with non-U.S. holders that hold our common stock as a capital asset.
For purposes of this summary, a "non-U.S. holder" means a beneficial
owner of our common stock that is not treated as a partnership for U.S. federal
income tax purposes and is not any of the following for U.S. federal income tax
purposes: (i) a citizen or resident of the U.S., (ii) a corporation, including
any entity treated as a corporation for U.S. federal income tax purposes,
created or organized in or under the laws of the U.S., any state thereof, or the
District of Columbia, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source, or (iv) a trust if (1) its
administration is subject to the primary supervision of a court within the U.S.
and one or more U.S. persons have the authority to control all of its
substantial decisions, or (2) it has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
This summary is based upon provisions of the Internal Revenue Code of
1986, as amended, and regulations, rulings and judicial decisions as of the date
hereof. Those authorities may be changed, perhaps retroactively, or be subject
to differing interpretations, so as to result in U.S. federal tax considerations
different from those summarized below. This summary does not represent a
detailed description of the U.S. federal tax considerations to you in light of
your particular circumstances. In addition, it does not represent a description
of the U.S. federal tax considerations to you if you are subject to special
treatment under the U.S. federal tax laws (including if you are a U.S.
expatriate, "controlled foreign corporation" or "passive foreign investment
company"), and it generally does not address any U.S. taxes other than the
federal income tax. We cannot assure you that a change in law will not alter
significantly the tax considerations that we describe in this summary.
If an entity classified as a partnership for U.S. federal income tax
purposes holds our common stock, the tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership. If
you are a partnership holding our common stock, or a partner in such a
partnership, you should consult your tax advisors.
If you are considering the purchase of our common stock, you should
consult your own tax advisors concerning the particular U.S. federal tax
consequences to you of the ownership and disposition of the common stock, as
well as the consequences to you arising under the laws of any other taxing
jurisdiction, including any state, local or foreign tax consequences.
Dividends
We have never declared or paid any cash dividends on our common stock
and do not currently anticipate paying any cash dividends on our common stock.
If we were to pay dividends in the future on our common stock, they would be
subject to U.S. federal income tax in the manner described below.
Dividends paid to a non-U.S. holder of our common stock generally will
be subject to withholding of U.S. federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or business by a
non-U.S. holder within the U.S. and, where an income tax treaty applies, are
attributable to a U.S. permanent establishment of the non-U.S. holder, are not
subject to this withholding tax, but instead are subject to U.S. federal income
tax on a net income basis at applicable individual or corporate rates. Certain
certification and disclosure requirements must be complied with in order for
effectively connected dividends to be exempt from this withholding tax. Any such
effectively connected dividends received by a foreign corporation may be subject
to an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
A non-U.S. holder of our common stock who is entitled to and wishes to
claim the benefits of an applicable treaty rate (and avoid backup withholding as
discussed below) for dividends, will be required to (i) complete Internal
Revenue Service, or IRS, Form W-8BEN (or successor form) and make certain
certifications, under penalty of perjury, to establish its status as a non-U.S.
person and its entitlement to treaty benefits (which may also require,
77
in certain circumstances, the provision of a U.S. taxpayer identification
number) or (ii) if the common stock is held through certain foreign
intermediaries, satisfy the relevant certification requirements of applicable
U.S. Treasury regulations. Special certification and other requirements apply to
certain non-U.S. holders that are entities rather than individuals.
A non-U.S. holder of our common stock eligible for a reduced rate of
U.S. federal withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by timely filing an appropriate claim for
refund with the IRS.
Gain on disposition of common stock
A non-U.S. holder generally will not be subject to U.S. federal income
tax with respect to gain recognized on a sale or other disposition of our common
stock unless (i) the gain is effectively connected with a trade or business of
the non-U.S. holder in the U.S. and, where a tax treaty applies, is attributable
to a U.S. permanent establishment of the non-U.S. holder (in which case, for a
non-U.S. holder that is a foreign corporation, the branch profits tax described
above may also apply), (ii) in the case of a non-U.S. holder who is an
individual, such holder is present in the U.S. for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, or (iii) we are or have been a "U.S. real property holding corporation" for
U.S. federal income tax purposes.
We believe we have not been and currently are not, and we do not
anticipate becoming, a "U.S. real property holding corporation" for U.S. federal
income tax purposes.
Federal estate tax
Common stock held by an individual non-U.S. holder at the time of death
will be included in such holder's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
Information reporting and backup withholding
We must report annually to the IRS and to each non-U.S. holder the
amount of dividends paid to such holder and the tax withheld (if any) with
respect to such dividends, regardless of whether withholding was required.
Copies of the information returns reporting such dividends and any withholding
may also be made available to the tax authorities in the country in which the
non-U.S. holder resides under the provisions of an applicable income tax treaty.
In addition, dividends paid to a non-U.S. holder generally will be subject to
backup withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of our common stock within the U.S. or
conducted through certain U.S.-related financial intermediaries is subject to
information reporting and, depending on the circumstances, backup withholding
unless the beneficial owner certifies under penalties of perjury that it is not
a U.S. person (and the payor does not have actual knowledge or reason to know
that the beneficial owner is a U.S. person) or the holder otherwise establishes
an exemption.
Any amounts withheld under the backup withholding rules may be allowed
as a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is timely furnished to the IRS.
78
LEGAL MATTERS
Certain legal matters have been passed upon for us by Paul, Hastings,
Janofsky & Walker LLP, New York, New York.
EXPERTS
We changed independent registered public accounting firms in April 2005,
from Grant Thornton LLP to Deloitte & Touche LLP. Information regarding the
change in independent accountants was reported in our Current Report on Form 8-K
dated April 4, 2005. There were no disagreements or reportable events requiring
disclosure under Item 304(b) of Regulation S-K.
Our consolidated financial statements at and for the year ended June 30,
2004, included in this prospectus and registration statement, have been audited
by Grant Thornton LLP, an independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon the reports of such firm given on the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements as of June 30, 2005, included in
this prospectus have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy
statements and other information with the SEC. These filings are not deemed to
be incorporated by reference into this prospectus or the registration statement
of which it forms a part. You may read and copy any documents filed by us at the
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Our filings with the SEC are also available to the public
through the SEC's website at http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act for the registration of the common stock offered by this
prospectus. This prospectus, which is a part of the registration statement, does
not contain all of the information included in the registration statement. Any
statement made in this prospectus concerning the contents of any contract,
agreement or other document is not necessarily complete. For further information
regarding our company and the common stock offered by this prospectus, please
refer to the registration statement, including the exhibits and schedules
thereto. If we have filed any contract, agreement or other document as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the documents of matter involved.
79
BIOENVISION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and
June 30, 2005 F-1
Consolidated Statements of Operations (Unaudited) for the periods ended
September 30, 2005 and 2004 F-2
Consolidated Statements of Stockholders' Equity for the
periods ended September 30, 2005 (Unaudited) and June 30, 2004 F-3
Consolidated Statements of Cash Flows (Unaudited) for the periods ended
September 30, 2005 and 2004 F-4
Notes to Consolidated Financial Statements (Unaudited) F-5
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm F-17
Report of Prior Independent Registered Public Accounting Firm F-18
Consolidated Balance Sheets as of June 30, 2005 and 2004 F-19
Consolidated Statements of Operations for years ended June 30,
2005 and 2004 F-20
Consolidated Statements of Stockholders' Equity (Deficit) for years
ended June 30, 2005 and 2004 F-21
Consolidated Statements of Cash Flows for years ended June 30, 2005 and
2004 F-22
Notes to Consolidated Financial Statements F-23
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, June 30,
2005 2005
----------- ---------
ASSETS
Current assets
Cash and cash equivalents $12,208,760 $31,407,533
Restricted cash 290,000 290,000
Short-term securities 48,209,088 32,746,948
Accounts receivable, less allowances of $869,220 and
$869,220, respectively 1,403,542 1,785,779
Inventory 361,741 277,908
Other current assets 781,060 342,628
------- -------
Total current assets 63,254,191 66,850,796
Property and equipment, net 290,068 279,778
Intangible assets, net 8,155,836 8,252,936
Goodwill 1,540,162 1,540,162
Security deposits 208,475 209,665
Deferred costs 3,599,006 3,656,798
--------- ---------
Total assets $ 77,047,738 $80,790,135
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$1,755,461 $1,602,267
Accrued expenses 5,266,932 4,581,444
Accrued dividends payable 57,329 56,404
Deferred revenue 498,607 498,607
------- -------
Total current liabilities 7,578,329 6,738,722
Deferred revenue 7,312,945 7,437,598
--------- ---------
Total liabilities 14,891,274 14,176,320
Commitments and contingencies
Stockholders' equity
Convertible preferred stock - $0.001 par value;
20,000,000 shares authorized; 2,250 2,250
2,250,000 shares issued and outstanding on each of
September 30, 2005 and June 30, 2005 (liquidation
preference $6,750,000)
Common stock - par value $0.001; 70,000,000 shares 40,761 40,559
authorized;
40,760,763 and 40,558,948 shares issued and
outstanding at September 30, 2005 and June 30, 2005,
respectively
Additional paid-in capital 129,282,618 128,946,717
Deferred compensation - (145,646)
Accumulated deficit (67,220,665) (62,331,005)
Accumulated other comprehensive income 51,500 100,940
------ -------
Stockholders' equity 62,156,464 66,613,815
---------- ----------
Total liabilities and stockholders' equity $77,047,738 $80,790,135
========== ==========
The accompanying notes are an integral part of these financial statements.
F-1
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
September 30,
2005 2004
----------- --------
(Restated -
Note I)
Revenue
Licensing and royalty revenue $400,130 $363,182
Product sales 194,996 -
Research and development contract revenue 75,092 722,146
------- ----------
Total revenue 670,218 1,085,328
Costs and expenses
Cost of products sold, including royalty expense
of $201,000 for the three months ending
September 30, 2005 328,291 -
Research and development 2,430,918 2,138,897
Selling, general and administrative 2,887,462 1,756,713
(includes stock based compensation expense of
$482,000 and $391,000 for the three months
ending September 30, 2005 and 2004,
respectively)
Depreciation and amortization 224,283 339,706
------- -------
Total costs and expenses 5,870,954 4,235,316
--------- ---------
Loss from operations (5,200,736) (3,149,988)
Interest and finance charges (66,761) -
Interest income 462,905 55,437
------- ------
Net loss (4,804,592) (3,094,551)
Cumulative preferred stock dividend (85,068) (126,341)
-------- ---------
Net loss available to common stockholders $(4,889,660) $(3,220,892)
=========== ===========
Basic and diluted net loss per share of
common stock $(0.12) $(0.11)
====== ======
Weighted average shares used in computing 40,572,626 28,516,450
basic and diluted net loss per share ========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Accumulated
Other Total
Convertible Additional Deferred Compre- Stock-
Preferred Stock Common Stock Paid In Compen- Accumulated hensive holders'
Shares $ Shares $ Capital sation Deficit Income (Loss) Equity
------ - ------ - ------- -------- ------- ------------ ------
Balance at July 1, 2004
(Restated - Note I) 3,341,666 $ 3,342 28,316,163 28,316 $ 68,517,702 $(223,990) $(37,664,141) $ 139,598 $30,800,827
Net loss for the period
(Restated - Note I) (24,262,785) (24,262,785)
Cumulative preferred stock
dividend for the period (404,079) (404,079)
Currency translation
adjustment (38,658) (38,658)
Deferred compensation 78,344 78,344
Preferred stock converted
to common stock (1,091,66) (1,092) 2,183,332 2,183 (1,092) -
Income related to
repricing of options (314,950) (314,950)
Warrants issued in
connection with services - 524,928 524,928
Shares issued in
connection with services 62,500 63 496,188 496,250
Options exercised to
common stock 685,833 686 707,638 708,324
Warrants exercised to
common stock 1,811,120 1,811 3,277,151 3,278,962
Shares issued in
connection with public
offering, net of related
expenses 7,500,000 7,500 55,739,152 55,746,652
---------- ------- ---------- -------- ------------ ---------- ------------- --------- -----------
Balance at June 30, 2005 2,250,000 $ 2,250 40,558,948 $ 40,559 $128,946,717 $(145,646) $(62,331,005) $ 100,940 $66,613,815
========== ======= ========== ======== ============ ========== ============= ========= ===========
Net loss for the period (4,804,592) (4,804,592)
Cumulative preferred stock
dividend (85,068) (85,068)
Currency translation
adjustment (49,440) (49,440)
Employee stock-based
compensation 458,565 458,565
Deferred compensation (136,457) 145,646 9,189
Options exercised 191,196 191 (191) -
Warrants issued in
connection with services 13,995 13,995
Warrants exercised 10,619 11 (11) -
---------- ------- ---------- -------- ------------ ---------- ------------- --------- -----------
Balance at September 30, 2005 2,250,000 $ 2,250 40,760,763 $ 40,761 $129,282,618 $ - $(67,220,665) $ 51,500 $62,156,464
========== ======= ========== ======== ============ ========== ============= ========= ===========
The accompanying notes are an integral part of this financial statement.
F-3
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
September 30,
--------------------------------
2005 2004
----------- -----------
Restated - Note I
Cash flows from operating activities
Net loss $(4,804,592) $(3,094,551)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 224,283 339,706
Stock based compensation 481,748 391,098
Changes in net deferred revenue and expenses (66,861) (77,502)
Changes in assets and liabilities
Accounts payable 167,241 45,349
Inventory (91,406) -
Other current assets (443,113) (140,459)
Accrued interest on investments (287,498) -
Accounts receivable 363,380 1,767,489
Accrued expenses 715,786 (453,012)
------- ---------
Net cash used in operating activities (3,741,032) (1,221,882)
Cash flows from investing activities
Purchase of intangible assets (103,586) (42,115)
Capital expenditures (35,576) (2,254)
Purchase of short-term securities (15,174,642) -
----------- -----------
Net cash used in investing activities (15,313,804) (44,369)
Cash flows from financing activities
Proceeds from exercise of options and warrants - 180,000
Dividends paid (84,144) (126,141)
-------- ------------
Net cash (used in) provided by financing activities (84,144) 53,859
Effect of exchange rates on cash (59,793) (294)
------------- -----------
Net decrease in cash and cash equivalents (19,198,773) (1,212,686)
Cash and cash equivalents, beginning of period 31,407,533 18,875,675
---------- ----------
Cash and cash equivalents, end of period $12,208,760 $17,662,989
========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(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. On December 29, 2004, the FDA 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.
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 certain 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 with
the European Medicines Evaluation Agency, or EMeA.
The Company is currently selling its second product, Modrenal(R), in the United
Kingdom. Modrenal(R) is approved in the U.K. for the treatment of
post-menopausal advanced breast cancer following relapse to initial hormone
therapy.
We anticipate that revenues derived from our two lead drugs, clofarabine and
Modrenal(R) will permit us to further develop the other products currently in
our pipeline. In addition to clofarabine and Modrenal(R), we are performing
initial development work on Virostat for the treatment of Hepatitis C and
Velostan, initially for the treatment of bladder cancer.
Significant Accounting Policies
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 104 "Revenue Recognition",
or SAB 104, upfront nonrefundable fees associated with research and development
collaboration agreements where the Company has continuing involvement in the
agreement, are recorded as deferred revenue and recognized over the estimated
research and development period using the straight-line method. If the estimated
period is subsequently modified, the period over which the up-front fee is
recognized is modified accordingly on a prospective basis using the
straight-line method. Continuation of certain contracts and grants are dependent
upon the Company and/or its co-development partners' achieving specific
contractual milestones; however, none of the payments received to date are
refundable regardless of the outcome of the project. Upfront nonrefundable fees
associated with licensing arrangements are recorded as deferred revenue and
recognized over the licensing arrangement using the straight line method, which
approximates the life of the patent.
Royalty revenue from product licensees is recorded as earned.
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 risk of loss is passed to the customer, the sales price is
fixed and determinable, and collectibility is reasonably assured.
Research & development contract revenue represent payments due from our
co-development partner relating to the reimbursement of 50% for certain of our
ongoing research costs in the development of clofarabine outside the United
States. Currently, the Company has billed but not recorded approximately
$1,825,000 of revenues relating to the reimbursement from our co-development
partner for certain of our ongoing research costs in the development of
clofarabine outside the United States. When the Company has determined that the
criteria relating to revenue recognition has been met, the Company will record
the revenue. At September 30, 2005, the Company continues to hold a provision
for bad debts of $869,000 relating to the outstanding receivables due from the
co-development partner.
The Company follows the guidance of Emerging Issues Task Force 99-19, or EITF,
"Reporting Revenue Gross as a Principal versus Net as an Agent" in the
presentation of revenues and direct costs of revenues. This guidance requires
the Company to assess whether it acts as a principal in the transaction or as an
agent acting on behalf of others. The Company records revenue transactions gross
in its statements of operations if it is deemed the principal in the
transaction, which includes being the primary obligor and having the risks and
rewards of ownership.
F-5
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Description of Business and Summary of Significant Accounting Policies
- continued
Research and development
Research and development costs are charged to expense as incurred. Research and
development costs include the cost of clofarabine sold prior to product approval
through our named patient program.
Accounting for Stock-Based Compensation
On July 1, 2005, the Company adopted the fair value recognition provisions of
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123 (R)"), requiring
the Company to recognize expense related to the fair value of stock-based
compensation. The modified prospective transition method was used as allowed
under SFAS No. 123 (R). Under this method, the stock-based compensation expense
includes: (a) compensation expense for all stock-based compensation awards
granted prior to, but not yet vested as of July 1, 2005, based on the grant date
fair value estimated in accordance with the original provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation"; and (b) compensation expense for all
stock-based compensation awards granted subsequent to July 1, 2005, based on the
grant date fair value estimated in accordance with the provisions of SFAS No.
123 (R). Prior to the adoption of SFAS 123 (R), the Company had accounted for
stock based compensation arrangements in accordance with provisions of
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees", as permitted by SFAS No. 123, "Accounting for Stock Based
Compensation." Under APB Opinion No. 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.
Upon adoption of SFAS 123 (R), beginning July 1, 2005, the Company reversed the
unrecognized deferred compensation costs, associated with options granted to
certain employees, of approximately $136,000 with a corresponding reduction to
the Company's Additional paid-in capital (see Note E). The Company also no
longer re-measures the intrinsic value of the 380,000 re-priced options granted
to an officer of the Company (see Note E). The Company recognized expense of
approximately $12,000 for the options during the three months ended September
30, 2005 based on the fair value, as determined in accordance with SFAS 123 (R),
of the modified award that remains unvested.
Beginning July 1, 2005, the Company is recognizing compensation costs for stock
option awards to employees based on their grant-date fair value. The fair value
of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average fair value per share
for the 10,000 stock options granted to employees during the three months ended
September 30, 2005 was $4.64. Values were estimated using a zero dividend yield,
expected volatility of 80%, and a risk free interest rate range of 3.99% to
4.07%. The expected term of 3.5 years was utilized based on historical exercise
of employees.
As required by SFAS 123 (R), management made an estimate of expected forfeitures
for all unvested awards and is recognizing compensation costs only for those
equity awards expected to vest. The impact on previously reported pro forma
disclosures under SFAS No. 123 where forfeitures were recognized as incurred is
not material. As of September 30, 2005, the total compensation cost related to
unvested equity awards granted to employees but not yet recognized is
approximately $3.2 million. This cost will be amortized on a straight-line basis
over the remaining weighted average vesting period of 1.1 years.
F-6
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Description of Business and Summary of Significant Accounting Policies
- continued
A summary of the Company's stock option activity for options issued to employees
and related information follows:
Weighted
Average
Weighted Remaining Aggregate
Number Average Contractual Intrinsic
of Shares Exercise Price Life Value
--------- -------------- ---- -----
Balance - June 30, 2005 4,156,000 $3.18
Granted during 2006 10,000 8.04
Exercised during 2006 225,000 1.25 $189,000
Forfeited during 2006 5,000 8.80
----------- --------
Balance - September 30, 2005 3,936,000 $3.30 5.31 $7,993,000
----------- --------
Exercisable - September 30, 2005 2,497,000 $2.21 3.49 $3,484,000
A summary of the Company's nonvested options at September 30, 2005 and changes
during the three months ended September 30, 2005 is presented below:
Weighted
Non-vested Average Fair
Number Value at
of Shares Grant Date
---------- ------------
Balance - June 30, 2005 1,434,000 $3.13
Granted during 2006 10,000 4.64
Exercised during 2006 - -
Vested during 2006 - -
Forfeited during 2006 5,000 5.03
------------- ----------
Balance - September 30, 2005 1,439,000 $3.13
----------- ---------
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 for the three months ended September 30, 2004.
Three months ended
September 30,
2004
----
(As restated)
Net loss available to common stockholders, $ (3,220,892)
as reported
Add: Stock-based employee compensation expense
(income) as reported (175,845)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (283,423)
----------------
Pro forma net loss $ (3,680,160)
Loss per share
Basic and diluted - as reported $ (0.11)
Basic and diluted - pro forma $ (0.13)
F-7
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Description of Business and Summary of Significant Accounting Policies
- continued
The weighted-average assumptions used for the three months ended September 30,
2004 were risk-free interest rate of 2.41%, expected dividend yield of 0.0%,
expected life of 3.89 years and expected volatility of 80%. The Company
corrected an error on the pro-forma stock based compensation disclosures
required under SFAS 123 determined under fair value based method in the table
above. In calculating the fair value using the Black-Scholes option-pricing
model, the Company unintentionally used the vesting term of the awards instead
of the expected term. The correction has decreased such amounts previously
reported in the proforma net loss for the three months ended September 30, 2004
by approximately $40,000.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and 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.
Income taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes", or SFAS 109. Under SFAS 109, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
basis of assets and liabilities and are measured using the enacted tax rates
that will be in effect when the differences are expected to reverse.
We have not generated any taxable income, subject to federal taxes, to date and,
therefore, have not paid any federal income taxes since inception. We record a
valuation allowance to reduce deferred income tax assets to an amount that is
more likely than not to be realized. Assessment of the realization of deferred
income tax assets requires that estimates and assumptions be made as to the
taxable income of future periods. Our deferred tax assets are reduced to zero,
as management believes that it is more likely than not that the deferred tax
assets will not be realized. Projection of future period earnings is inherently
difficult as it involves consideration of numerous factors such as our overall
strategies and estimates of new product development and acceptance, product
lifecycles, selling prices and volumes, responses by competitors, manufacturing
costs and assumptions as to operating expenses and other industry specific and
macro and micro economic factors.
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
11,234,314 and 12,983,535 shares of common stock have not been included in the
calculation of net loss per share for the three months ended September 30, 2005
and 2004, respectively, as their effect would have been anti-dilutive.
Comprehensive Loss
Total comprehensive loss for the three months ended September 30, 2005 and 2004
was $4,939,000 and $3,087,000, respectively.
Foreign currency translation
The reporting currency of the Company is the US dollar. The functional currency
of Bioenvision Limited, the Company's wholly-owned subsidiary, organized under
the laws of the United Kingdom with offices in Edinburgh, Scotland, is the Pound
Sterling. We translate assets and liabilities to their U.S. dollar equivalents
at rates in effect at the balance sheet date and record translation adjustments
in accumulated other comprehensive income (loss). We translate statement of
income accounts at average rates for the period. For the three months ended
September 30, 2005, foreign currency transaction gains and losses included in
selling, general and administrative expense were $1,000 and $9,000,
respectively.
Cash and cash equivalents and Short-term securities
The Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents. All funds invested
in a Certificate of Deposit with maturities greater than three months and less
than one year are classified as short-term securities determined by management
to be available-for-sale securities.
F-8
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Description of Business and Summary of Significant Accounting Policies
- continued
Deferred costs
Deferred costs represent payments to Southern Research Institute, or SRI, and to
Stegram Pharmaceutical Ltd, which directly relate to milestone payments received
in connection with the Genzyme Co-Development Agreement and the Dechra
Sub-License Agreement, respectively. The amortization of these costs have been
presented in research and development on the statement of operations.
Credit Risk
Our accounts receivable are primarily due from wholesale distributors and our
co-development partners. One customer comprises approximately 52% of revenues
earned for the three months ended September 30, 2005. At September 30, 2005, the
Company continues to hold a provision for bad debts of $869,000 relating to the
outstanding receivables due from the customer. Another customer comprises
approximately 29% of revenues earned for the three months ended September 30,
2005.
Inventory
Inventories are stated at the lower of cost or market, cost being determined
under the first-in, first-out method. We only capitalize inventory that is
produced for commercial sale. The Company periodically reviews inventories and
items considered outdated or obsolete are reduced to their estimated net
realizable value. Inventories consisted of $117,000 and $0 of raw materials,
$6,000 and $171,000 of work-in-progress, and $239,000 and $107,000 of finished
goods at September 30, 2005 and June 30, 2005, respectively.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over their estimated useful lives, which range from 3 to 7 years.
Estimated September 30, June 30,
Asset Description Useful Life 2005 2005
----------------- ----------- ---- ----
Computer equipment and software 3 to 5 years 337,000 305,000
Furniture and fixtures 7 years 51,000 49,000
------ ------
388,000 354,000
-------- --------
Less: accumulated depreciation (97,000) (74,000)
-------- --------
Net property and equipment $ 291,000 $ 280,000
========== ==========
The Company recorded depreciation expense for the three months ended September
30, 2005 and 2004 of approximately $24,000 and $5,000 respectively.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial instruments,
consisting of cash, cash equivalents, short term securities, accounts
receivable, accounts payable and accrued liabilities, approximates their
carrying value due to the immediate or short-term maturity associated with these
instruments.
F-9
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Description of Business and Summary of Significant Accounting Policies
- continued
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over the fair value of identifiable net
assets of Pathagon. Intangible assets include patents and licensing rights
acquired in connection with the acquisition of Pathagon. The Company accounts
for these assets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill is not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.
For goodwill, each year and whenever impairment indicators are present, we will
calculate the implied fair value of each goodwill amount and record an
impairment loss for the excess of book value over the implied fair value, if
any.
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 144 on July 1, 2003. In
accordance with SFAS No. 144, long-lived assets, such as property and equipment
and intangible assets subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset (see Note D).
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 153 "Exchange of Nonmonetary 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 Nonmonetary
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
nonmonetary 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.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS 151
amends Accounting Research Bulletin ("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 was effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of SFAS 151 did not
have a material impact on the results of operations or financial position of the
company.
NOTE B - Interim Financial Statements
In the opinion of management, the accompanying unaudited 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 September 30, 2005, the consolidated results of operations for the three
months ended September 30, 2005 and 2004, the consolidated statements of
stockholders equity for the three months ended September 30, 2005, and cash
flows for the three months ended September 30, 2005 and 2004. Certain
reclassifications of balances previously reported have been made to conform to
the current presentation.
The consolidated balance sheet at June 30, 2005 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,
2005.
The consolidated results of operations for the three months ended September 30,
2005 and 2004 are not necessarily indicative of the results to be expected for
any other interim period or for the full year.
F-10
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 for certain 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 is 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, is paying the Company a royalty on
sales in the U.S. and Canada. 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 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 Genzyme and received an
additional $3.5 million in December 2003 when it converted Genzyme's option to
market clofarabine in the U.S. into a sublicense. Upon Genzyme's filing the New
Drug Application for clofarabine with the FDA, the Company received an
additional (i) $2 million in April 2004 and (ii) $2 million in September 2004.
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 each of the three months ended September 30, 2005 and
2004, the Company recognized revenues of approximately $110,000, 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 Genzyme. 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 $55,000
for each of the three months ended September 30, 2005 and 2004.
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 ("GMP").
F-11
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - License and Co-Development Agreements -continued
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, currently
through September 2022. The Company recognized revenues of approximately $15,000
and $28,000 in connection with the upfront payment from Dechra for the three
months ended September 30, 2005 and 2004, 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 $3,000 and $6,000 for the three months ended September 30, 2005
and 2004, respectively.
NOTE D- Intangible Assets
September 30, June 30,
2005 2005
---- ----
Patents & Trademarks $9,618,000 $9,514,000
Accumulated Amortization (1,462,000) (1,261,000)
---------------------------
$8,156,000 $8,253,000
===========================
Amortization of patents and trademarks amounted to $201,000 and $334,000 for the
three months ended September 30, 2005 and 2004, respectively. Intangible assets
are recorded at cost and amortized over periods generally ranging from 5-20
years. Amortization for each of the next five fiscal years is expected to amount
to approximately $800,000 annually.
At June 30, 2005, we recognized an impairment of approximately $5,276,000
relating to the methylene blue intangible acquired in connection with the
Pathagon acquisition. Due to the loss of an intellectual property patent suit
which occurred during the Company's fourth quarter of 2005, relating to the
international use of virostat in fresh frozen plasma, we re-evaluated the
intangible asset relating to Virostat at June 30, 2005. At that date, we
estimated that our undiscounted future cash flows, relating solely and
exclusively to approved uses of Virostat, were less than the carrying value of
our long-lived asset. As a result, we recognized a non-cash impairment loss of
$5,276,000, equal to the difference between the estimated future cash flows for
approved uses of Virostat, discounted at an appropriate rate, and the carrying
amount of the asset. Making the determinations of impairment and the amount of
impairment requires significant judgment by management and assumptions with
respect to the future cash flows of the assets. Changes in events or
circumstances that may affect long-lived assets makes judgments and assumptions
with respect to the future cash flows highly subjective.
NOTE E - Stockholders' Transactions
Stock Options
The Board of Directors adopted, and the stockholders approved the 2003 Stock
Incentive Plan at the Annual Meeting held in January of 2004. The plan was
adopted to recognize the contributions made by the Company's employees,
officers, consultants, and directors, to provide those individuals with
additional incentive to devote themselves to our future success and to improve
the Company's ability to attract, retain and motivate individuals upon whom the
Company's growth and financial success depends. Under the plan, stock options
may be granted as approved by the Board of Directors or the Compensation
Committee. There are 4,500,000 shares reserved for grants of options under the
plan and at September 30, 2005, options to purchase 2,966,500 shares of common
stock had been issued. The Company's policy is to issue new shares for option
exercises. Stock options vest pursuant to individual stock option
F-12
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - Stockholders' Transactions -continued
agreements. No options granted under the plan are exercisable after the
expiration of ten years (or less in the discretion of the Board of Directors or
the Compensation Committee) from the date of the grant. The plan will continue
in effect until terminated or amended by the Board of Directors or until
expiration of the plan on November 17, 2013.
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 fair value 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 remeasured the intrinsic value of these
options at the end of each reporting period based on changes in the stock price
through June 30, 2005. As a result of the adoption of SFAS 123 (R) on July 1,
2005, the Company no longer re-measures the intrinsic value of the 380,000
re-priced options. The Company determined the fair value of the modified award
in accordance with SFAS 123, the guidance then in effect and has recognized
expense relating to the portion of the options that were unvested on July 1,
2005. For the three months ended September 30, 2005 and 2004, the Company
recognized stock based employee compensation (expense) income of approximately
$(12,000) and $198,000, respectively, related to these options.
For the three months ended September 30, 2004, the Company recorded compensation
expense of approximately $22,000 as a result of 505,000 options granted to
certain employees at an exercise price below the grant date trading price. Upon
adoption of SFAS 123 (R), beginning July 1, 2005, the Company reversed the
unrecognized deferred compensation costs of approximately $136,000, associated
with these options, with a corresponding reduction to the Company's additional
paid-in capital and is recognizing the fair value estimated in accordance with
the original provisions of SFAS No. 123 for the unvested options.
On January 6, 2005, the Company granted 7,500 options to a board member for
serving as a member of the Board of Directors, at an exercise price of $8.17 per
share which 1,875 vest immediately on the grant date and the remaining 5,625
vest ratably on the first, second and third anniversaries of the grant date. The
Company recognized approximately $2,000 as consulting expense for the three
months ended September 30, 2005.
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 approximately $12,000 as consulting expense for
both the three months ended September 30, 2005 and 2004 relating to said
options.
During the three month period ended September 30, 2005, certain non-employee
holders of options exercised pursuant to the cashless exercise feature available
to such option holders and the Company issued approximately 191,196 shares of
its common stock in connection therewith.
Warrants
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 recognized
approximately $218,000 as consulting expense for the three months ended
September 30, 2004.
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 recognized approximately
$155,000 as consulting expense for the three months ended September 30, 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 recognized approximately
$9,000 and
F-13
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - Stockholders' Transactions -continued
$181,000 as consulting expense for the three months ended September 30, 2005 and
2004, respectively, relating to said warrants.
During the three months ended September 30, 2005, certain warrant holders of the
Company exercised their warrants to acquire 10,619 shares of the Company's
common stock. The Company received proceeds of approximately $76,000 from the
exercise of such warrants.
Common Stock
On December 3, 2004, the Company issued 62,500 shares of common stock to a
consultant for services rendered. In connection with such issuance we recognized
approximately $497,000 as compensation expense for the period ended June 30,
2005.
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 $55.6 million, after deducting underwriting discounts
and commissions and estimated offering expenses.
NOTE F-Quarterly Tax Accounting Policy
Income taxes have been provided for using the liability method in accordance
with SFAS No. 109. The provision for income taxes reflects management's estimate
of the effective tax rate expected to be applicable for the full fiscal year.
This estimate is re-evaluated by management each quarter based on the Company's
estimated tax expense for the year. The Company also pays capital stock tax to
certain state and local jurisdictions. The Company evaluates the amount due on a
quarterly basis.
NOTE G - Geographic Information
We define geographical regions as countries in which we operate. Our corporate
headquarters in the United States collects licensing, royalties and research &
development contract revenue from our arrangements with external customers and
our co-development partners. Our wholly owned subsidiary, Bioenvision Limited,
located in the United Kingdom manages our product sales (including the named
patient program).
The following table reconciles our revenues by geographic region to the
consolidated total:
Three Months Ended
September 30
2005 2004
Region
United States $400,000 $1,075,000
United Kingdom 270,000 10,000
------- ------
$670,000 $1,085,000
======== ==========
NOTE H - Litigation
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 I - Restatement
In May of 2005, the Company identified an error with respect to the accounting
for income taxes in connection with the Pathagon acquisition completed on
February 1, 2002. The Company had originally concluded that the realization of
the deferred tax asset related to the net operating losses and other deductible
temporary differences existing at the acquisition date, and generated after the
acquisition date, did not meet the "more likely than not" criteria and, as a
result, a valuation allowance was established on the deferred tax assets of the
Company. The Company's restated accounting treatment determined that the
deferred tax liability recorded in connection with the Pathagon acquisition
creates taxable income as the taxable temporary differences reverse.
F-14
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I- Restatement - continued
Consequently, the ability to realize the deferred tax assets is "more likely
than not" and a valuation allowance is not required against the deferred tax
assets, to the extent the deferred tax liability offsets the deferred tax
assets. This restated accounting treatment resulted in the recognition of our
deferred tax assets to the extent of our deferred tax liabilities. The deferred
tax asset, in excess of the deferred tax liability, is not "more likely than
not" to be realized, and therefore, a full valuation allowance has been
established against the net deferred tax asset.
The Company restated its previously reported financial statements and all
interim periods as of and for the years ended June 30, 2004 and 2003, to record
additional benefit relating to the recognition of deferred tax assets as
indicated in the first paragraph of this note. For the years ended June 30,
2004, June 30, 2003, and June 30, 2002, the Company previously recorded the
reduction to the deferred tax liability and a corresponding tax benefit of
$537,000, $537,000 and $253,000, respectively. In the restated financial
statements for years ended June 30, 2004 and June 30, 2003, the Company recorded
deferred tax assets, with a corresponding additional deferred tax benefit of
$923,000 and $1,580,000, respectively, offsetting the deferred tax liability
resulting from the Pathagon acquisition. Additionally, as of the acquisition
date on February 1, 2002, a deferred tax asset was recorded for $2,363,000 with
a corresponding reduction to goodwill. This represented the deferred tax assets
that existed at the date of acquisition and for which the previously recorded
valuation allowance was eliminated.
As a result of the above, the Company previously restated its consolidated
financial statements as of June 30, 2004 in its Form 10-KSB/A. The following is
a summary of the effects of the income tax accounting corrections on the
Company's consolidated financial statements for the three months ended September
30, 2004.
For the three and six months ended September 30, 2004 and December 31, 2004, the
Company had recorded a deferred tax liability for $5,647,000 and $5,505,000,
respectively. Due to the correction of an error, the Company has now reported no
net deferred tax asset or deferred tax liability for the three months ended
September 30, 2004.
Three months ended
September 30, 2004
As Reported As Restated
----------------------------------------------------------------------
Consolidated Statements of
Operations:
Income tax benefit $ 134,226 $ -
Net loss (2,960,325) (3,094,551)
Net loss available to common
stockholders (3,086,666) (3,220,892)
Basic and diluted net loss per
share of common stock $ (0.11) $ (0.11)
F-15
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I- Restatement-continued
The restatement has no effect on total cash flows from operating, investing, or
financing activities as shown in the Consolidated Statement of Cash Flows.
However, the restatement did affect the individual components of net loss and
deferred tax benefit within the net cash from operating activities.
As of and for the three months
ended September 30, 2004
(as reported) (as restated)
Goodwill 3,902,705 1,540,162
Total assets 41,337,877 38,975,334
Deferred tax liability 5,646,573 -
Total liabilities 16,471,168 10,824,595
Accumulated deficit (44,169,063) (40,885,033)
Shareholder's equity 24,866,709 28,150,739
Revenue 1,085,328 1,085,328
Loss before income tax
benefit (3,094,551) (3,094,551)
Income tax benefit 134,226 -
---------- ----------
Net loss (2,960,325) (3,094,551)
Net loss available to
common shareholders (3,086,666) (3,220,892)
Net loss available to
common shareholders per
basic and dilutive share $(0.11) $(0.11)
The quarterly net loss per common share amounts are rounded to the nearest cent.
Annual net loss per common share may vary depending on the effect of such
rounding.
Additionally, the Company restated the pro-forma stock based compensation
disclosures required under SFAS 123 determined under fair value based method due
to the correction of an error noted during February 2005. Refer to Note A for
further discussion.
F-16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bioenvision, Inc.:
We have audited the accompanying consolidated balance sheet of Bioenvision, Inc.
and subsidiaries (the "Company") as of June 30, 2005, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements present fairly, in
all material respects, the financial position of Bioenvision, Inc. and
subsidiaries as of June 30, 2005, and the results of its operations and its cash
flows for the year ended June 30, 2005, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 12, 2005
F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Bioenvision, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Bioenvision, Inc.
and Subsidiaries as of June 30, 2004 and the related consolidated statement of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bioenvision, Inc.
and Subsidiaries as of June 30, 2004, and the consolidated result of their
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As more fully described in Note 10, the June 30, 2004 financial statements have
been restated.
/s/ Grant Thornton LLP
New York, New York
September 16, 2004 (except for Note 10, as to which the date is May 27, 2005)
F-18
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2005 2004
------------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 31,407,533 $ 18,875,675
Restricted cash 290,000 290,000
Short-term securities 32,746,948 -
Accounts receivable (less allowances for bad debts of $869,220 and $0,
respectively) 1,785,779 2,627,773
Inventory 277,908 -
Other current assets 342,628 253,311
------------- -----------
Total current assets 66,850,796 22,046,759
Property and equipment, net 279,778 47,857
Intangible assets, net 8,252,936 14,563,660
Goodwill 1,540,162 1,540,162
Security Deposits 209,665 79,111
Deferred costs 3,656,798 3,893,295
------------- ----------
Total assets $ 80,790,135 $ 42,170,844
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,602,267 $ 1,495,866
Accrued expenses and other current liabilities 4,581,444 1,322,584
Accrued dividends payable 56,404 90,141
Deferred revenue 498,607 551,828
------- -------
Total current liabilities 6,738,722 3,460,419
Deferred revenue 7,437,598 7,909,598
------------- -----------
Total liabilities 14,176,320 11,370,017
------------- -----------
Stockholders' equity
Convertible Preferred stock - $0.001 par value; 20,000,000 shares authorized;
2,250,000 and 3,341,666 shares issued and outstanding at June 30, 2005
and June 30, 2004, respectively (liquidation preference $6,750,000 and
$10,024,998, respectively) 2,250 3,342
Common stock - $0.001 par value; 70,000,000 shares authorized; 40,558,948 and
28,316,163 shares issued and outstanding at
June 30, 2005 and June 30, 2004, respectively 40,559 28,316
Additional paid-in capital 128,946,717 68,517,702
Deferred compensation (145,646) (223,990)
Accumulated deficit (62,331,005) (37,664,141)
Accumulated other comprehensive income 100,940 139,598
------------- -----------
Stockholders' equity 66,613,815 30,800,827
------------- -----------
Total liabilities and stockholders' equity $ 80,790,135 $ 42,170,844
============= ==========
The accompanying notes are an integral part of these financial statements.
F-19
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
June 30,
----------------------------------
2005 2004
------------- -----------
Revenue
License and royalty revenue $ 1,463,326 $ 1,014,717
Product sales 611,346 -
Research and development contract revenue 2,576,502 2,087,497
------------- ----------
Total revenue 4,651,174 3,102,214
Costs and expenses
Cost of products sold (including royalty expense of $524,755
for the year ended June 30, 2005) 921,262 -
Research and development 10,894,925 4,882,574
Provision for bad debts 869,220 -
Selling, general and administrative 10,181,711 9,082,420
(includes stock based compensation expense of $793,761 and $3,491,252
for the years ended June 30, 2005 and 2004,
respectively)
Depreciation and amortization 1,438,517 1,348,064
Loss on impairment
5,276,162 -
------------- ----------
Total costs and expenses 29,581,797 15,313,058
----------- -------------
Loss from operations (24,930,623) (12,210,844)
Interest income (expense)
Interest and finance charges (79,484) -
Interest income 747,322 99,763
------------- ----------
Net loss before income tax benefit (24,262,785) (12,111,081)
Income tax benefit
- 1,459,814
Net loss (24,262,785) (10,651,267)
------------- ----------
Cumulative preferred stock dividend (404,079) (856,776)
-------------- --------------
Net loss available to common stockholders $ (24,666,864) $(11,508,043)
============== ===========
Basic and diluted net loss per share of common stock $ (0.72) $ (.57)
============= ===========
Weighted-average shares used in
computing basic and diluted
net loss per share of common stock 34,042,391 20,257,482
========== ==========
The accompanying notes are an integral part of these financial statements.
F-20
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Total
Convertible Additional Deferred Compre- Stock-
Preferred Stock Common Stock Paid In Compen- Accumulated hensive holders'
Shares $ Shares $ Capital sation Deficit Income (Loss) Equity
------ - ------ - ------- -------- ------- ------------ ------
Balance at July 1, 2003 5,916,966 $ 5,917 17,122,739 $ 17,123 $ 47,304,449 $ - $(26,156,098) $ 152,346 $21,323,737
Net loss for the period (10,651,267) (10,651,267)
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 employee 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 2,509,883 2,511,166
---------- ------- ---------- -------- ------------ ---------- ------------- --------- -----------
Balance at June 30, 2004 3,341,666 $ 3,342 28,316,163 $ 28,316 $ 68,517,702 $(223,990) $(37,664,141) $ 139,598 $30,800,827
Net loss for the period (24,262,785) (24,262,785)
Cumulative preferred stock
dividend for the period (404,079) (404,079)
Currency translation
adjustment (38,658) (38,658)
Deferred compensation 78,344 78,344
Options exercised to
common stock 685,833 686 707,638 708,324
Income related to
repricing of options (314,950) (314,950)
Warrants issued in
connection with services 524,928 524,928
Warrants exercised to
common stock 1,811,120 1,811 3,277,151 3,278,962
Shares issued in
connection with services 62,500 63 496,188 496,250
Preferred stock converted
to common stock (1,091,666) (1,092) 2,183,332 2,183 (1,092) -
Shares issued in
connection with public
offering ,net of related
expenses 7,500,000 7,500 55,739,152 55,746,652
---------- ------- ---------- -------- ------------ ---------- ------------- --------- -----------
Balance at June 30, 2005 2,250,000 $ 2,250 40,558,948 $ 40,559 $128,946,717 $(145,646) $(62,331,005) $ 100,940 $66,613,815
========== ======= ========== ======== ============ ========== ============= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-21
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
June 30,
----------------------------------
2005 2004
------------- -----------
Cash flows from operating activities
Net loss $(24,262,785) $(10,651,267)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,438,517 1,348,064
Provision for bad debts 869,220 -
Deferred tax benefit - (1,459,814)
Stock based compensation 793,761 3,491,252
Changes in net deferred revenues and expenses (288,723) 3,577,474
Loss on impairment 5,276,162 -
Changes in assets and liabilities
Accounts payable 121,966 1,084,474
Inventory (286,089) -
Other current assets (94,797) (147,335)
Security deposits (132,072) -
Accounts receivable (56,596) (2,602,773)
Other long term assets - 126,870
Accrued expenses and other liabilities 3,203,998 591,862
------------ -------
Net cash used in operating activities (13,417,438) (4,641,193)
------------ ----------
Cash flows from investing activities
Purchase of intangible assets (359,411) (112,580)
Capital expenditures (278,044) (18,337)
Purchase of short-term securities (32,746,948) -
------------ --------
Net cash used in investing activities (33,384,403) (130,917)
----------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock, net of related
expenses 55,746,652 14,967,064
Proceeds from exercise of options and warrants 3,987,286 2,539,565
Dividends paid (437,816) (1,775,782)
------------- ----------
Net cash provided by financing activities 59,296,122 15,730,847
Effect of exchange rate on cash 37,577 (12,748)
------ --------
Net increase in cash and cash equivalents 12,531,858 10,945,989
Cash and cash equivalents, beginning of period 18,875,675 7,929,686
----------- ------------
Cash and cash equivalents, end of period $ 31,407,533 $ 18,875,675
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-22
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
Description of business
Bioenvision, Inc., or Bioenvision or the Company, is a product-focused
biopharmaceutical company with two approved cancer therapeutics. On December 29,
2004, the Food and Drug Administration, or FDA, approved the Company's 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 United States, or U.S.,
and the European Union, or E.U. Genzyme Corporation, the Company's
co-development partner, currently holds marketing rights in the U.S. and Canada
for clofarabine for certain cancer indications and controls U.S. development of
clofarabine in these indications. Genzyme is selling clofarabine under the brand
name Clolar(R) in the U.S. In Europe, the Company has filed for approval of
clofarabine in pediatric ALL and pediatric acute myelogenous leukemia, or AML,
with the European Medicines Evaluation Agency, or EMeA.
The Company is currently selling its second product, Modrenal(R), in the United
Kingdom, or U.K. Modrenal(R) is approved in the U.K. for the treatment of
post-menopausal advanced breast cancer following relapse to initial hormone
therapy.
We anticipate that revenues derived from our two lead drugs, clofarabine and
Modrenal(R) will permit us to further develop the other products currently in
our product pipeline. In addition to clofarabine and Modrenal(R), we are
performing initial development work on Virostat for the treatment of Hepatitis C
and Velostan, initially for the treatment of bladder cancer.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Inter-company accounts and
transactions have been eliminated. Certain reclassifications of balances
previously reported have been made to conform to current presentation.
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.
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 104, or SAB 104, upfront
nonrefundable fees associated with research and development collaboration
agreements where the Company has continuing involvement in the agreement, are
recorded as deferred revenue and recognized over the estimated research and
development period using the straight-line method. If the estimated period is
subsequently modified, the period over which the up-front fee is recognized is
modified accordingly on a prospective basis using the straight-line method.
Continuation of certain contracts and grants are dependent upon the Company
and/or its co-development partners' achieving specific contractual milestones;
however, none of the payments received to date are refundable regardless of the
outcome of the project. Upfront nonrefundable fees associated with licensing
arrangements are recorded as deferred revenue and recognized over the licensing
arrangement using the straight line method, which approximates the life of the
patent.
Royalty revenue from product licensees is recorded as earned.
F-23
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
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 risk of loss is passed to the customer, the sales price is
fixed and determinable, and collectibility is reasonably assured.
Research & development contract revenue represent payments due from our
co-development partner relating to the reimbursement of 50% for certain of our
ongoing research costs in the development of clofarabine outside the United
States.
Currently, the Company has billed but not recorded approximately $1,142,000 of
revenues relating to the reimbursement from our co-development partner for
certain of our ongoing research costs in the development of clofarabine outside
the United States. When the Company has determined that the criteria relating to
revenue recognition has been met, the Company will record the revenue.
Provision for bad debts for the years ended June 30, 2005 and 2004 were
approximately $869,000 and $0, respectively. The increase is due to the Company
recording a valuation allowance relating to certain of the outstanding
receivable balances from our co-development partner totaling $869,000 in the
current year.
The Company follows the guidance of Emerging Issues Task Force 99-19, or EITF,
"Reporting Revenue Gross as a Principal versus Net as an Agent" in the
presentation of revenues and direct costs of revenues. This guidance requires
the Company to assess whether it acts as a principal in the transaction or as an
agent acting on behalf of others. The Company records revenue transactions gross
in its statements of operations if it is deemed the principal in the
transaction, which includes being the primary obligor and having the risks and
rewards of ownership.
Research and development
Research and development costs are charged to expense as incurred. Research and
development costs include the cost of clofarabine sold prior to product approval
through our named patient program.
Stock based compensation
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation," or SFAS
123, the Company accounts for stock based compensation arrangements with
employees in accordance with provisions of Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees," or APB 25. 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. For year ended June 30, 2005, the Company recognized stock
based employee compensation income of $315,000 as a result of the re-pricing of
380,000 options granted to an employee pursuant to the terms of his Employment
Agreement (see Note 6). The Company also recognized a compensation expense of
$88,000 for the year ended June 30, 2005 as a result of 505,000 options granted
to certain employees on January 20, 2004.
F-24
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 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," or
EITF 96-18. 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.
The following table illustrates the effect on net loss and loss per share as if
the fair value based method had been applied to all outstanding and unvested
awards in each period.
Year Ended June 30,
------------------------------
2005 2004
----------- -----------
Net loss available to common stockholders, as reported $ (24,666,864) $(11,508,043)
Add: Stock based employee compensation (income) expense
as reported (227,417) 2,419,677
Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards (2,427,771) (861,297)
Pro forma net loss $ (27,322,052) $ (9,949,663)
============== =============
Loss per share
Basic and diluted - as reported $(0. 72) $(0.57)
Basic and diluted - pro forma $(0.80) $(0.49)
The fair value of options at the date of grant was established using the
Black-Scholes model with the following assumptions:
2005 2004
---- ----
Expected average life (years) 3.87 3.50
Risk free interest rate 3.37% 2.35%
Expected volatility 80% 80%
Expected dividend yield 0% 0%
In December 2004, FASB issued SFAS No. 123 (R), "Share-Based Payment", a
revision of SFAS 123. SFAS 123 (R) supersedes APB 25 and amends SFAS No. 95
"Statement of Cash Flows". SFAS 123(R) is similar to the approach described in
SFAS 123 except that SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the consolidated
statements of income, in lieu of pro-forma disclosure as provided above. SFAS
123 (R) is effective for fiscal periods beginning after June 15, 2005. The
Company has adopted the provisions of SFAS 123 (R) as of July 1, 2005, the first
day of fiscal 2006, and applied the modified-prospective method using the
Black-Scholes model for estimating the fair value of equity compensation.
F-25
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
As permitted by SFAS 123, through June 30, 2005 the Company accounted for
share-based payments to employees using the intrinsic value method set forth in
APB 25 and, as such, generally recognized no compensation cost for employee
stock options. Accordingly, the adoption of the fair value method under SFAS
123(R) will have a significant impact on the Company's consolidated statements
of income. However, the Company's overall cash position will not be affected by
the adoption of SFAS 123(R). The actual impact of SFAS 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future and other factors.
However, had the Company adopted SFAS 123(R) in prior periods, the impact of
that standard and therefore, the disclosure of pro forma net income and earnings
per share above would remain the same. SFAS 123(R) also requires that tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as operating cash flow. This requirement will reduce net
operating cash flow and increase net financing cash flow in periods after the
adoption of SFAS 123(R). Estimation of the increase in net financing cash flow
and decrease in net operating cash flow depends on the timing and exercise of
stock options and is difficult to predict. The amount of operating cash flow
recognized in prior periods for such excess tax deductions was $0 and $890,000
for years ended June 30, 2005 and 2004, respectively.
Income taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Under SFAS 109, deferred tax assets and liabilities are determined based
on the differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse. The Company records a valuation
allowance for certain temporary differences for which it is more likely than not
that it will not receive future tax benefits.
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
11,472,414 and 13,674,242 shares of common stock have not been included in the
calculation of net loss per share for the years ended June 30, 2005 and 2004,
respectively, as their effect would have been anti-dilutive.
Comprehensive Loss
Total comprehensive loss for the years ended June 30, 2005 and 2004 was
$24,705,522 and $11,520,791, respectively.
Foreign currency translation
The reporting currency of the Company is the US dollar. The functional currency
of Bioenvision Limited, the Company's wholly-owned subsidiary, organized under
the laws of the United Kingdom with offices in Edinburgh, Scotland, is the Pound
Sterling. We translate assets and liabilities to their U.S. dollar equivalents
at rates in effect at the balance sheet date and record translation adjustments
in accumulated other comprehensive income (loss). We translate statement of
income accounts at average rates for the period. For the year ended June 30,
2005, foreign currency transaction gains and losses included in selling, general
and administrative expense were $33,000 and $6,000, respectively.
Cash and cash equivalents and Short-term securities
The Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents. All funds invested
in a Certificate of Deposit with maturities greater than three
F-26
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
months and less than one year are classified as short-term securities determined
by management to be available-for-sale securities.
Deferred costs
Deferred costs represent payments to Southern research Institute, or SRI, and to
Stegram Pharmaceutical Ltd, which directly relate to milestone payments received
in connection with the Genzyme Co-Development Agreement and the Dechra
Sub-License Agreement, respectively. The amortization of these costs have been
presented in research and development on the statement of operations.
Credit Risk
Our accounts receivable are primarily due from wholesale distributors and our
co-development partners. One customer comprises approximately 62% of revenues
earned at June 30, 2005. Based on our evaluation of the collectibility of these
accounts receivable, we believe that this balance may not be collectible and
therefore have reserved 100% of the balance outstanding at June 30, 2005.
F-27
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
Inventory
Inventories are stated at the lower of cost or market, cost being determined
under the first-in, first-out method. We only capitalize inventory that is
produced for commercial sale. The Company periodically reviews inventories and
items considered outdated or obsolete are reduced to their estimated net
realizable value. Inventories consisted of $171,000 of work-in-progress and
$107,000 of finished goods at June 30, 2005.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over their estimated useful lives, which range from 3 to 7 years.
Estimated
Asset Description Useful Life 2005 2004
Property and
Computer equipment and software 3 to 5 years 304,892 43,879 equipment
Furniture and fixtures 7 years 49,364 35,052
------- ------
354,256 78,931
------- ------
Less: accumulated depreciation (74,478) (31,074)
------- -------
Net Property and equipment $ 279,778 $ 47,857
============== =============
The Company recorded depreciation expense for the years ended June 30, 2005 and
2004 of approximately $45,000 and $20,000 respectively.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial instruments,
consisting of cash, cash equivalents, short term securities, accounts
receivable, accounts payable and accrued liabilities, approximates carrying
value due to the immediate or short-term maturity associated with these
instruments.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over the fair value of identifiable net
assets of Pathagon. Intangible assets include patents and licensing rights
acquired in connection with the acquisition of Pathagon. The Company accounts
for these assets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill is not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.
For goodwill, each year and whenever impairment indicators are present, we will
calculate the implied fair value of each goodwill amount and record an
impairment loss for the excess of book value over the implied fair value, if
any.
F-28
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 144 on July 1, 2003. In
accordance with SFAS No. 144, long-lived assets, such as property and equipment
and intangible assets subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset (see Note 3).
Note 2 - Acquisition of Pathagon
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(R) and methylene blue (collectively referred to as
"Purchased Technologies"), were recorded at their fair market value 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 which 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 $2,341,000. The Company
recorded a charge to goodwill of $801,395 for fiscal year ended June 30, 2003 as
a result of a change in tax rates used to compute the deferred tax liability
arising as a result of this acquisition. 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(R) technology is a patented anti-microbial 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 Pathagon and, by
virtue of the acquisition of Pathagon, 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
anti-microbial 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
F-29
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 2 - Acquisition of Pathagon - continued
OMRF $100,000 and issued 200,000 shares of the Company's common stock and a
five-year warrant to purchase an additional 200,000 shares of common stock. The
exercise price of the warrant is $2.33 per share, subject to adjustment. The
Company capitalized the costs of approximately $1,145,600 related to this
amendment as an intangible asset and will amortize this asset over the remaining
life of the methylene blue license agreement.
Note 3 - Intangible Assets
As of June 30
-------------
Intangible assets consist of the following: 2005 2004
---- ----
Patents and licensing rights $9,514,026 $17,757,101
Less: accumulated amortization
(1,261,090) (3,193,441)
----------- ------------
$8,252,936 $14,563,660
=========== ============
Amortization of patents and licensing rights amounted to $1,394,000 and
$1,328,000 for the years ended June 30, 2005 and June 30, 2004, respectively.
Other intangible assets are recorded at cost and amortized over periods
generally ranging from 10-20 years. Amortization for each of the next five
fiscal years will amount to approximately $900,000 annually.
At June 30, 2005, we recognized an impairment of approximately $5,276,000
relating to the methylene blue intangible acquired in connection with the
Pathagon acquisition. Due to the loss of an intellectual property patent suit
which occurred during the Company's fourth quarter, relating to the
international use of virostat in fresh frozen plasma, we re-evaluated the
intangible asset relating to Virostat at June 30, 2005. At that date, we
estimated that our undiscounted future cash flows, relating solely and
exclusively to approved uses of Virostat, were less than the carrying value of
our long-lived asset. As a result, we recognized a non-cash impairment loss of
$5,276,000, equal to the difference between the estimated future cash flows for
approved uses of Virostat, discounted at an appropriate rate, and the carrying
amount of the asset. Making the determinations of impairment and the amount of
impairment requires significant judgment by management and assumptions with
respect to the future cash flows of the assets. Changes in events or
circumstances that may affect long-lived assets makes judgments and assumptions
with respect to the future cash flows highly subjective.
Note 4 - License and Co-Development Agreements
Clofarabine
The Company has a license from SRI 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.
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., our sub-licensor until
it was acquired by Genzyme Corporation 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
F-30
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 4 - License and Co-Development Agreements - continued
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 for
certain 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. Under the terms of the co-development agreement,
Genzyme also pays royalties to SRI based on certain milestones. The Company also
is obligated to pay certain royalties to SRI with respect to clofarabine.
The Company received a nonrefundable upfront payment of $1.35 million when it
entered into the co-development agreement with Genzyme and received an
additional $3.5 million in December 2003 when it converted Genzyme's option to
market clofarabine in the U.S. into a sublicense. Upon Genzyme's filing the New
Drug Application for clofarabine with the FDA, the Company received an
additional (i) $2 million in April 2004 and (ii) $2 million in September 2004.
The Company deferred the upfront payment and recognized revenues ratably, on a
straight-line basis over the related initial 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 years ended June 30, 2005 and 2004, the
Company recognized revenues of approximately $438,000, and $161,000,
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 Genzyme. 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 $219,000
and $81,000 for the years ended June 30, 2005 and 2004, 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, currently
through September 2022. The Company recognized revenues of approximately $87,000
and $114,000 in connection with the upfront payment from Dechra for the years
ended June 30, 2005 and 2004, 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 $17,400 and $23,000 for the years ended June 30, 2005 and 2004,
respectively.
F-31
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 5 - Income Taxes
The components of the income tax benefit are as follows:
June 30,
------------------------------------
2005 2004
------------------ ------------------
Current:
Federal $ -- $ --
------------------ ------------------
State -- --
------------------ ------------------
Deferred:
Federal -- (1,099,000)
State -- (361,000)
------------------ ------------------
-- (1,460,000)
------------------ ------------------
Total benefit $ -- $ (1,460,000)
================== ==================
The domestic and foreign components of loss before income taxes are as follows:
June 30,
----------------------
2005 2004
-------- --------
Domestic $(22,601,000) $(10,781,000)
Foreign (1,662,000) (1,330,000)
----------- -----------
Loss before taxes $(24,263,000) $(12,111,000)
=========== ===========
F-32
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 5 - Income taxes - continued
The following is a reconciliation of benefit for income taxes from continuing
operations computed at the federal statutory rates to the effective rates for
the years ended June 30, 2005 and 2004
June 30,
----------------
2005 2004
--------- --------
Consolidated tax benefit at federal statutory rate (34.0%) (34.0%)
Non-deductible expenses (0.3%) 6.8%
State income tax benefit, net of federal provision (6.1%) (4.5%)
Valuation allowance 40.1% 19.3%
Foreign rate differential 0.3% 0.4%
Other, net 0.0% (0.1%)
--------- --------
Effective tax rate 0.0% (12.1%)
======== ========
Significant components of the company's deferred tax assets and liability at
June 30, are as follows:
June 30,
------------------
2005 2004
----------- -----------
Deferred tax liability
Acquired intangibles $(2,923,000) $(5,781,000)
Deferred costs (1,481,000) (1,577,000)
Amortization (115,000) (43,000)
Depreciation (33,000) (30,000)
Other (3,000) (3,000)
----------- ----------
Total deferred tax liability (4,555,000) (7,434,000)
Deferred tax assets
Net operating loss 14,344,000 6,384,000
Options, warrants and shares issued to non- 534,000 345,000
employees
Options issued to employees 164,000 104,000
Deferred revenue 3,214,000 3,427,000
Provision for bad debts 352,000 -
Accrued expenses 126,000 68,000
----------- ----------
Total deferred tax assets 18,734,000 10,328,000
Valuation allowance for deferred tax assets (14,179,000) (2,894,000)
----------- ----------
Net deferred tax asset 4,555,000 7,434,000
----------- ----------
Net deferred tax liability $ - $ -
=========== ==========
F-33
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 5 - Income Taxes - continued
At June 30, 2005 and 2004, the Company had approximately $32,524,000 and
$14,087,000 of net operating loss carryforwards for U.S. Federal and state
income tax purposes, respectively that begin to expire in fiscal year ending
2020, with a tax value of $13,172,000 and $5,705,000, respectively. At June 30,
2005 and 2004, the Company also had approximately $3,906,000 and $2,263,000 of
net operating loss carryforwards relating to foreign operations, respectively,
with no expiration date, with a tax value of $1,172,000 and $679,000,
respectively.
At June 30, 2005 and 2004, the Company has recorded a valuation allowance of
$14,179,000 and $2,894,000 respectively, relating to the net deferred tax asset
due the uncertainty of both the foreign and domestic companies being more likely
than not to utilize these deferred tax assets. Of these amounts, a valuation
allowance of $650,000 was recorded at June 30, 2005 and 2004 for certain US
deferred tax assets which will be recognized after the period in which the
Pathagon deferred tax liability reverses. The remaining allowance relates to the
net operating loss of the foreign operations due to the uncertainty that the
Company will realize taxable income in the foreign jurisdiction to utilize the
net operating loss carryforward.
Included in the June 30, 2005 and 2004 net operating loss is $3,857,000 and
$415,000, respectively related to exercise of non-qualified stock options or
disqualifying dispositions of stock acquired with incentive stock options. A
valuation allowance has been established against this loss. When the valuation
allowance is removed, the tax affected benefit of $1,562,000 and $168,000,
respectively, related to this loss will be credited to equity.
The Tax Reform Act of 1986 enacted a complex set of rules (Internal Revenue Code
Section 382) limiting the utilization of net operating losses to offset future
taxable income following a corporate "ownership change." Generally, this occurs
when there is a greater than 50 percentage point change in ownership.
Accordingly, such change could limit the amount of net operating losses
available in a given year, which could ultimately cause net operating losses to
expire prior to utilization.
Note 6 - Stockholders' Transactions
Stock Options
The Board of Directors adopted, and the stockholders approved the 2003 Stock
Incentive Plan at the Annual Meeting held in January of 2004. The plan was
adopted to recognize the contributions made by the Company's employees,
officers, consultants, and directors, to provide those individuals with
additional incentive to devote themselves to our future success and to improve
the Company's ability to attract, retain and motivate individuals upon whom the
Company's growth and financial success depends. Under the plan, stock options
may be granted as approved by the Board of Directors or the Compensation
Committee. There are 4,500,000 shares reserved for grants of options under the
plan and at June 30, 2005, options to purchase 2,956,500 shares of common stock
had been issued. Stock options vest pursuant to individual stock option
agreements. No options granted under the plan are exercisable after the
expiration of ten years (or less in the discretion of the Board of Directors or
the Compensation Committee) from the date of the grant. The plan will continue
in effect until terminated or amended by the Board of Directors or until
expiration of the plan on November 17, 2013.
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 the 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 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 $0.735 per share which vested immediately. As a result of the re-pricing of
380,000 options, the Company will re-measure the intrinsic value of these
options at the end of each reporting period and will adjust compensation
F-34
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 6 - Stockholders' Transactions - continued
expense based on changes in the stock price. Stock based compensation income
(expense) recognized as a result of this re-pricing amounted to $315,000 and
$(2,381,000) for the years ended June 30, 2005 and 2004, respectively.
During the year ended June 30, 2005, certain option holders of the Company
exercised with cash their options to acquire 685,833 shares of the Company's
common stock. The Company received proceeds of approximately $708,000 during the
year ended June 30, 2005, from the exercise of these options.
During the year ended June 30, 2005, certain non-employee holders of options
exercised pursuant to the cashless exercise feature available to such option
holders and the Company issued approximately 212,709 shares of its common stock
in connection therewith.
On January 20, 2004, the Company granted 25,000 options to a member of the Board
of Directors, 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 $47,000 and $21,000 as
consulting expenses for the years ended June 30, 2005 and June 30, 2004,
respectively.
The Company recorded a compensation expense of $88,000 and $38,611 for the years
ended June 30, 2005 and June 30, 2004, respectively, as a result of 505,000
options granted to certain employees on January 20, 2004 at a strike price that
was lower than the exercise price.
On January 6, 2005, the Company granted 7,500 options to a board member for
serving as a member of the Board of Directors, at an exercise price of $8.17 per
share which 1,875 vest immediately on the grant date and the remaining 5,625
vest ratably on the first, second and third anniversaries of the grant date. The
Company recognized approximately $13,000 as consulting expense for the year
ended June 30, 2005.
F-35
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 6 - Stockholders' Transactions - continued
A summary of the Company's stock option activity for options issued to
employees and related information follows:
Number Weighted Average
of Shares Exercise Price
------------- -------------
Balance - June 30, 2003 3,570,000 $ 1.23
Granted during 2004 720,000 $ 5.02
Exercised during 2004 20,000 $ 1.42
------------- -------------
Balance - June 30, 2004 4,270,000 $ 1.87
Granted during 2005 784,000 $ 7.99
Exercised during 2005 885,500 $ 1.08
Forfeiture during 2005 12,500 $ 3.53
------------- -------------
Balance - June 30, 2005 4,156,000 $ 3.18
============= =============
Stock Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------------------------------------
Weighted
Average
Weighted Remaining Number of Weighted
Average Number of Contractual Stock Options Average
Exercise Price Range Exercise price Options Life Exercisable Exercise price
----------------------------------------------------------------------------------------------------------------------
$0.74 - $1.45 $ 1.29 2,685,000 3.21 2,283,000 $ 1.18
$4.05 - $4.05 $ 4.05 497,000 8.56 166,000 $ 4.05
$5.44 - $6.50 $ 5.93 111,000 9.26 29,000 $ 6.05
$7.87 - $8.87 $ 8.21 863,000 9.41 243,000 $ 8.20
-------------- --------------
$0.74 - $8.87 $ 3.18 4,156,000 5.30 2,721,000 $ 2.03
============== ==============
The weighted-average grant date fair value of options granted for the periods
ended June 30, 2005 and 2004 was $4.75 and $3.13, respectively
Convertible Preferred Stock
On May 7, 2002 the Company authorized the issuance and sale of up to 5,920,000
shares of Series A Convertible 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. In May 2002, the
Company consummated a Private Placement of Series A Preferred Stock and received
gross proceeds of $17.7 million. 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. The preferred stock generally carries rights to vote with
the
F-36
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 6 - Stockholders' Transactions - continued
holders of common stock as one class on a two-for-one basis. The preferred stock
is convertible into the Company's common stock, at the holder's option, 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.
The Company is required to accrue for and pay a dividend of 5%, subject to
certain adjustments, on its cumulative Series A Convertible Preferred Stock. The
Company has paid the dividend in cash to holders of Series A Convertible
Preferred Stock through July 30, 2005.
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.
During the year ended June 30, 2005, certain holders of 1,091,666 shares of the
Company's preferred stock converted such shares into 2,183,332 shares of the
Company's common stock. In addition, during the year ended June 30, 2005,
certain warrant holders of the Company exercised their warrants to acquire
1,598,411 shares of the Company's common stock. The Company received proceeds of
approximately $3,278,963 during the year ended June 30, 2005 from the exercise
of these warrants.
Common Stock
On December 18, 2004, the Company issued 62,500 shares of its common stock to a
consultant to the Company for services rendered to the Company. The Company
recorded compensation expense of approximately $497,000 for the year ended June
30, 2005 in connection with such issuance.
On February 8, 2005, the Company completed a secondary public offering in which
it sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $55.7 million, after deducting underwriting discounts
and commissions and offering expenses.
Warrants
On June 22, 2004 the Company entered into a consulting agreement pursuant to
which consultant will provide certain investor relation services on behalf of
the Company. In connection therewith, the Company issued a warrant to said
consultant pursuant to which said consultant has the right to purchase 50,000
shares of 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
recognized approximately $243,000 as a consulting expense for the year ended
June 30, 2005.
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 recognized approximately $75,000
as consulting expense for the year ended June 30, 2005, 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 recognized approximately
$138,000 as consulting expense for year ended June 30, 2005 relating to said
warrants.
F-37
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 7- Geographic Information
We have one operating segment and define geographical regions as countries in
which we operate. Our corporate headquarters in the United States collects
licensing, royalties and research & development contract revenue from our
arrangements with external customers and our co-development partners. Our wholly
owned subsidiary, Bioenvision Limited, located in the United Kingdom manages our
product sales (including the named patient program). The following table
reconciles our revenues by geographic region to the consolidated total:
Year ended June 30,
2005 2004
Region
------
United States $ 3,373,547 $ 2,929,719
United Kingdom 1,277,627 172,495
---------------------------------------------
$ 4,651,174 $ 3,102,214
Note 8 - 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 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
of our common stock 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 260,290
shares of common stock for $6.25 per share for the March and May 2004
financings.
Note 9 - Commitments and Contingencies
Leases
The Company leases 5,549 square feet of office space for its New York, New York
headquarters under a non-cancelable operating lease expiring on December 29,
2009 and approximately 2,437 square feet in Edinburgh, Scotland under a lease
agreement for its subsidiary Bioenvision Ltd. which expires February 28, 2006.
Rent expense for both facilities in the aggregate for the year ended June 30,
2005, was approximately $421,000. Further, the Company leases two vehicles under
leases which expire November 29, 2005 and February 28, 2007. Lease expense was
approximately $34,000 and $37,000 for the years ended June 30, 2005 and June 30,
2004, respectively. At June 30, 2005, total minimum rentals under operating
leases with initial or remaining non-cancelable lease terms of more than one
year were approximately:
Year ended June 30,
2006 $ 773,000
2007 546,000
2008 316,000
2009 316,000
2010 159,000
-----------
$ 2,110,000
-----------
F-38
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 9 - Commitments and Contingencies - continued
Litigation
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. Each of the parties has moved for summary judgment
dismissing all but one of the claims of the other parties. Those motions have
not been decided by the Court.
Note 10 - Restatements
In May of 2005, the Company identified an error with respect to the accounting
for income taxes in connection with the Pathagon acquisition completed on
February 1, 2002. The Company had originally concluded that the realization of
the deferred tax asset related to the net operating losses and other deductible
temporary differences existing at the acquisition date, and generated after the
acquisition date, did not meet the "more likely than not" criteria and, as a
result, a valuation allowance was established on the deferred tax assets of the
Company. The Company's restated accounting treatment determined that the
deferred tax liability recorded in connection with the Pathagon acquisition
creates taxable income as the taxable temporary differences reverse.
Consequently, the ability to realize the deferred tax assets is "more likely
than not" and a valuation allowance is not required against the deferred tax
assets, to the extent the deferred tax liability offsets the deferred tax
assets. This restated accounting treatment resulted in the recognition of our
deferred tax assets to the extent of our deferred tax liabilities. The deferred
tax asset, in excess of the deferred tax liability, is not "more likely than
not" to be realized, and therefore, is fully valued.
The Company restated its previously reported financial statements and all
interim periods as of and for the years ended June 30, 2004 and 2003, to record
additional benefit relating to the recognition of deferred tax assets as
indicated in the first paragraph of this note. In years ended June 30, 2004,
June 30, 2003, and June 30, 2002, the Company previously recorded the reduction
to the deferred tax liability and a corresponding tax benefit of $537,000,
$537,000 and $253,000, respectively. In the restated financial statements for
years ended June 30, 2004 and June 30, 2003, the Company recorded deferred tax
assets, with a corresponding additional deferred tax benefit of $923,000 and
$1,580,000, respectively, offsetting the deferred tax liability resulting from
the Pathagon acquisition. Additionally, as of the acquisition date on February
1, 2002, a deferred tax asset was recorded for $2,363,000 with a corresponding
reduction to goodwill. This represented the deferred tax assets that existed at
the date of acquisition and for which the previously recorded valuation
allowance was eliminated.
As a result of the above, the Company previously restated its consolidated
financial statements as of June 30, 2004 in its Form 10-KSB/A. The following is
a summary of the effects of the income tax accounting corrections on the
Company's consolidated financial statements for the years ended June 30, 2004
and 2003.
F-39
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 10 - Restatements - continued
June 30 2004 2003
As Reported As Restated As Reported As Restated
----------------------------------------------------------------------------------------------
Consolidated Balance
Sheets:
Goodwill $ 3,902,705 $ 1,540,162 $ 3,902,705 $ 1,540,162
Total assets 44,533,387 42,170,844 28,535,675 26,173,132
Deferred tax liability 5,780,799 - 6,317,702 1,459,814
Total liabilities 17,150,816 11,370,017 9,707,283 4,849,395
Accumulated deficit (41,082,397) (37,664,141) (28,651,443) (26,156,098)
Total shareholders'
equity 27,382,571 30,800,827 18,828,392 21,323,737
Year Ended June 30 2004 2003
As Reported As Restated As Reported As Restated
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations:
Income tax benefit $ 536,903 $ 1,459,814 $ 536,903 $ 2,117,103
Net loss (11,574,178) (10,651,267) (6,746,326) (5,166,126)
Net loss available to common stockholders (12,430,954) (11,508,043) (7,624,144) (6,043,944)
Basic and diluted net loss per share of
common stock $ (0.61) $ (0.57) $ (0.45) $ (0.36)
The restatement has no effect on total cash flows from operating, investing, or
financing activities as shown in the Consolidated Statement of Cash Flows.
However, the restatement did affect the individual components of net loss and
deferred tax benefit within the net cash from operating activities.
Additionally, the Company restated the pro-forma stock based compensation
disclosures required under SFAS 123 determined under fair value based method due
to the correction of an error noted during February 2005.
F-40