FORM 10-Q
Washington, D.C. 20549
(Mark One)
For the quarterly period ended June 30, 2002
OR
For the transition period from _________________ to _______________
Commission file number 1-12830
BioTime, Inc.
935 Pardee StreetBerkeley, California 94710(Address of principal executive offices)
(510) 845-9535(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 13,490,101 common shares, no par value, as of August 14, 2002.
TABLE OF CONTENTS
PART 1— FINANCIAL INFORMATION
Statements made in this Report that are not historical facts may constitute forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed. Such risks and uncertainties include but are not limited to those discussed in this report under Item 1 of the Notes to Financial Statements, and in BioTime’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Words such as “expects,” “may,” “will,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify forward-looking statements.
Item 1. Financial Statements
BIOTIME, INC,(A Development Stage Company)
CONDENSED BALANCE SHEETS(Unaudited)
See notes to condensed financial statements.
2
BIOTIME, INC.(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS(Unaudited)
3
CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)
(Continued)
4
5
NOTES TO CONDENSED FINANCIAL STATEMENTS(unaudited)
6
7
8
9
10
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Since its inception in November 1990, the Company has been engaged primarily in research and development activities which have culminated in the commercial launch of Hextend, its lead product, and a clinical trial of PentaLyte. The Company’s operating revenues have been generated primarily from licensing fees and royalties, including $2,500,000 of licensing fees received from Abbott Laboratories for the right to manufacture and market Hextend® in the United States and Canada. As a result of the developmental nature of its business and the limited sales of its product, since the Company’s inception in November 1990 it has incurred $32,259,827 of losses. The Company’s ability to generate substantial operating revenue depends upon its success in developing and marketing or licensing its plasma volume expanders and organ preservation solutions and technology for medical use.
Most of the Company’s research and development efforts have been devoted to the Company’s first three blood volume replacement products: Hextend,® PentaLyte,® and HetaCool.™ By testing and bringing all three products to the market, BioTime can increase its market share by providing the medical community with solutions to match patients’ needs. By developing technology for the use of HetaCool in low temperature surgery, trauma care, and organ and tissue transplant surgery, BioTime may also create new market niches for its product line.
The Company’s first product, Hextend, is a physiologically balanced blood plasma volume expander, for the treatment of hypovolemia. Hextend is being sold in the United States by Abbott Laboratories under an exclusive license from the Company. Abbott also has the right to sell Hextend in Canada, where it has recently been approved for sale. Abbott also has a right to obtain licenses to manufacture and sell other BioTime products.
Under its License Agreement with the Company, Abbott will report sales of Hextend and pay the Company the royalties and license fees due on account of such sales within 90 days after the end of each calendar quarter. The Company recognizes such revenues in the quarter in which the sales report is received, rather than the quarter in which the sales took place, as the Company does not have sufficient sales history to accurately predict quarterly sales. Hextend sales are still in the ramp-up phase. Revenues for the three months ended June 30, 2002 consist of royalties on sales made by Abbott during the period beginning January 1, 2002 and ending March 31, 2002. Royalty
12
revenues recognized for the three months ended June 30, 2002 were $60,812, a 103% increase over the $29,958 of royalty revenue during the same period of the prior year.
BioTime received royalty revenues of $85,843 on sales during the three months ended June 30, 2002. These royalties will be recognized as revenue during the third quarter of 2002. This represents a 41.2% increase from second quarter revenue, and a 135.7% increase from revenues recognized during the third quarter of 2001. The growth of royalty revenue from Hextend sales is shown graphically below:
Hextend has been approved for use and added to hospital formularies in hundreds of hospitals. Inclusion on hospital formularies is important because it enables physicians to obtain Hextend without the need to special order it. Obtaining formulary approval can be a lengthy process and requires diligent efforts by the sales force who not only provide Hextend to the hospital but also can provide the formulary committee with necessary information showing that the product is safe and effective.
13
Hextend has become the standard plasma volume expander at a number of prominent teaching hospitals and leading medical centers. BioTime believes that as Hextend use proliferates within the leading US hospitals, other smaller hospitals will follow their lead and accelerate sales growth.
On June 14, 2002, a Blood Products Advisory Committee chosen by officials of the United States Food and Drug Administration (the “FDA”) advised the FDA that a warning regarding bleeding in cardiac surgery should be added to the labeling of plasma expanders consisting of 6% hetastarch in normal saline. This recommendation was made following reports of bleeding in patients and a request by a manufacturer to add a warning to the labeling of the saline-based hetastarch solution. The Committee recommendation did not pertain to Hextend, which includes 6% hetastarch in a balanced electrolyte solution rather than normal saline, and was considered by the Committee to be a different product.
BioTime has been informed that Hextend has been purchased for use by certain armed forces units deployed overseas, and arrangements have been made to facilitate additional purchases of Hextend by the military and other federal government agencies. BioTime is continuing to work to promote the use of Hextend by the United States armed forces. Military physicians and researchers are evaluating Hextend for use as part of the standard treatment of hypovolemia in combat casualties, and a number of laboratories under the direction of the armed forces or engaged in civilian-directed medical research projects receiving military funding, have conducted studies using Hextend in animal models of military trauma. Some of the results of these studies were discussed at a recent conference sponsored by the Office of Naval Research and other military organizations to create a consensus regarding animal models for research into military trauma. A group of military and civilian physicians meeting under the acronym “STORMACT” (Strategies TO Reduce Military And Civilian Transfusions), has recommended Hextend for use in the treatment of combat-related injuries.
The Company has completed a Phase I clinical trial of PentaLyte and is planning the next phase of its clinical trials in which PentaLyte will be used to treat hypovolemia in surgery. The results of the Phase I trial are scheduled for presentation at the upcoming meeting of the American Society of Anesthesiologists to be held in Orlando, Florida in October 2002.
The Company is also continuing to develop solutions for low temperature surgery. Once a sufficient amount of data from successful low temperature surgery has been compiled, the Company plans to seek permission to use Hextend as a complete replacement for blood under near-freezing conditions. BioTime currently plans to market Hextend for complete blood volume replacement at very low temperatures under the registered trademark “HetaCool™” after FDA approval is obtained. In a recent article appearing in the April 2002 volume of the Canadian Journal of Anesthesia, Drs. David Moskowitz, Aryeh Shander and their colleagues at Engelwood Hospital in New Jersey reported that they replaced 35% of a patient’s blood with Hextend in a procedure known as acute normovolemic hemodilution (ANH) prior to chilling to 15oC and surgically removing a tumor which had grown from the kidney capsule into the inferior vena cava, and up into the right side of the heart. The patient was released from the hospital one week later, and his recovery was uneventful.
14
BioTime has recently launched a research program using HetaCool in animal models of trauma at the State University of New York Health Science Center in Brooklyn. Preliminary laboratory results there have already supported the feasibility of using HetaCool to treat subjects following severe hemorrhage. The use of HetaCool at near-freezing temperatures also will be studied in animal models of cardiovascular surgery at the Texas Heart Institute in Houston. The project has been approved by the appropriate internal committees, and is awaiting the beginning of experimentation.
BioTime scientists believe that the HetaCool program has the potential to produce a product that could be used in very high fluid volumes (50 liters or more per procedure if HetaCool were used as an organ preservation solution or to temporarily replace substantially all of the patient’s circulating blood volume) in cardiovascular surgery, trauma treatment, and organ transplantation.
Abbott has an option to obtain a license to market PentaLyte and HetaCool in the United States and Canada, and BioTime would receive additional license fees if those options are exercised, in addition to royalties on subsequent sales of those products. BioTime and certain pharmaceutical companies are discussing potential manufacturing, distributing and marketing agreements for BioTime products in the rest of the world.
In order to commence clinical trials for regulatory approval of new products or new therapeutic uses of products, it will be necessary for the Company to prepare and file with the FDA an Investigational New Drug Application (“IND”) or an amendment to expand a previous filing. Filings with foreign regulatory agencies may require clinical trials overseas. The Company is working to obtain regulatory approval in Sweden, a member of the European Union. Regulatory approvals for other countries that are members of the European Union may be obtained through a mutual recognition process. If approvals can be obtained in the requisite number of member nations, then the Company would be permitted to market Hextend in all 16 member nations.
In addition to developing clinical trial programs, the Company plans to continue to provide funding for its laboratory testing programs at selected universities, medical schools and hospitals for the purpose of developing additional uses of Hextend, PentaLyte, HetaCool, and other new products, but the amount of research that will be conducted at those institutions will depend upon the
15
Company’s financial status. Because the Company’s research and development expenses, clinical trial expenses, and production and marketing expenses will be charged against earnings for financial reporting purposes, management expects that there will be losses during the near future.
Hextend® and PentaLyte® are registered trademarks, and HetaCool™ and HetaFreeze™ are trademarks, of BioTime.
Results of Operations
Revenues
From inception (November 30, 1990) through June 30, 2002, the Company recognized $2,500,000 of license fee revenues. All license fees based upon milestones under the Abbott License Agreement were earned prior to the year ended December 31, 1999. See Note 2 to the accompanying condensed financial statements.
From inception (November 30, 1990) through June 30, 2002, the Company has recognized $322,456 in royalty revenue based on product sales. For the three months ended June 30, 2002, the Company recognized $60,812 in royalty revenue, whereas the Company recognized $29,958 for the three months ended June 30, 2001. This 103% increase in royalties is attributable to an increase in product sales by Abbott. See Note 2 to the accompanying condensed financial statements. For the six months ended June 30, 2002, the Company recognized $118,047 in royaly revenue, compared to $62,653 recognized for the six months ended June 30, 2001. Again, this 88% increase is due to an increase in product sales by Abbott. See Note 2 to the accompanying condensed financial statements.
Operating Expenses
From inception (November 30, 1990) through June 30, 2002, the Company incurred $22,234,562 of research and development expenses, including salaries, supplies and other related expense items. Research and development expenses were $343,473 for the three months ended June 30, 2002, compared to $541,894 for the three months ended June 30, 2001. The decrease is attributable to a concerted and ongoing effort to cut expenses. Specifically, the Company decreased its expenses for laboratory equipment and supplies, fees paid to scientific consultants, clinical trial work, and wages paid to scientific and research personnel within the Company. Research and development expenses decreased to $604,044 for the six months ended June 30, 2002, from $1,095,786 for the six months ended June 30, 2001. Research and development expenses include laboratory study expenses, European clinical trial expenses, salaries, preparation of additional regulatory applications in the United States and Europe, manufacturing of solution for trials, and consultants’ fees. It is expected that research and development expenses will increase if the Company commences new clinical studies of its products in the United States and Europe.
From inception (November 30, 1990) through June 30, 2002, the Company incurred $14,049,761 of general and administrative expenses. General and administrative expenses were $290,627 for the three months ended June 30, 2002, compared to $613,490 for the three months ended June 30, 2001. General and administrative expenses decreased to $622,034 for the six months ended June 30, 2002, from $1,050,487 for the six months ended June 30, 2001. The decrease is
16
primarily attributable to a reduction in personnel costs, while efforts to cut other expenses have also been a contributing factor. General and administrative expenses include salaries, consultants’ fees, and general operating expenses.
Interest Expense
For the three months and six months ended June 30, 2002, the Company had interest expense of $215,349 and $387,014, respectively. This interest expense is related to $3,350,000 of debentures issued by the Company to a group of investors in August, 2001. See Note 3 to the condensed financial statements for further details.
Liquidity and Capital Resources
Since inception, the Company has primarily financed its operations through the sale of equity securities, licensing fees, and borrowings. On August 12, 2002, BioTime completed a private placement of 1,852,785 common shares for $2,075,119 ($1,846,856 net proceeds after placement fees) through Ladenburg Thalmann Co., Inc. The money will be used for clinical and pre-clinical product development, and for working capital. The Company has agreed to register these shares for sale under the Securities Act of 1933, as amended. Under the private placement memorandum, the Company is required to file a registration statement with the SEC within fifteen business days after the termination of the offering, and must cause the registration statement to become effective within ninety days after filing. If the Company fails to file the registration statement, or fails to cause it to become effective in a timely fashion, then the Company must pay each holder of the shares, as liquidated damages, 1% of the purchase price of his or her shares for the first month of default, and 2% of the purchase price for each month thereafter until such time as the Company is able to cure the default. In connection with the offering, and in addition to the placement fees referred to above, the Company granted to Ladenburg Thalmann Co., Inc., warrants to purchase 129,695 common shares at an exercise price of $1.34 per share. The warrants are fully vested and non-forfeitable, and expire on August 11, 2007.
During August 2001, the Company received cash and converted debt totaling $3,350,000 through the sale of debentures to a group of private investors, including Alfred D. Kingsley, an investor and consultant to the Company, who purchased $1,500,000 of debentures, and Milton Dresner, a director of the Company. Mr. Kingsley’s investment included the conversion of the $1,000,000 principal balance of a line of credit that he had previously provided.
Interest on the debentures is payable at an annual rate of 10% and is payable semiannually. The principal amount of the debentures will be due and payable on August 1, 2004. BioTime may prepay the debentures, in whole or in part, at any time without premium or penalty. Under the terms of the debentures BioTime has agreed to restrict its quarterly cash payments for operating expenses to not more than $450,000 (excluding interest payable on the debentures) plus the amount of cash revenues (excluding interest and dividends) it collects for the quarter. To the extent BioTime’s expenditures during any quarter are less than $450,000 over its revenues, it may expend the difference in one or more subsequent quarters. The spending restriction will expire when BioTime obtains at least $5,000,000 in cash through sales of equity securities or pays off the debenture indebtedness in full. For this purpose, cash revenues will include royalties, license fees, and other proceeds from the sale or licensing of its products and technology, but will not include interest, dividends, and any monies borrowed or the proceeds from the issue or sale of any debt or equity securities. BioTime has also agreed not to declare or pay any cash dividends on its capital stock or to redeem or repurchase any shares of its capital stock, until it has paid off the debenture indebtedness in full.
Investors who purchased the debentures also received warrants to purchase a total of 515,383 common shares at an exercise price of $6.50 per share. The warrants will expire if not exercised by August 1, 2004. Since the end of June 2002, the Company has had the right to call the warrants for redemption at a redemption price of $0.01 per share if the closing price of the Company’s common shares on the American Stock Exchange equals or exceeds 150% of the exercise price for fifteen (15)
17
consecutive trading days and the shares issuable upon the exercise of the warrants have been registered for sale under the Securities Act of 1933, as amended.
On March 27, 2002, the Company entered into a new Credit Agreement with Alfred D. Kingsley under which the Company may borrow up to $300,000 for working capital purposes. Amounts borrowed under the 2002 Credit Agreement will bear interest at 10% per annum and will be due on March 27, 2003 or when BioTime receives at least $600,000 through the sale of capital stock, loans from other lenders, fees under licensing agreements (excluding royalty payments), or any combination of those sources. Mandatory prepayments of principal will be due to the extent that the Company receives funds from any one or more of those sources in excess of $300,000 but less than $600,000, and the amount of any such mandatory prepayments of principal will reduce the maximum amount available under the 2002 Credit Agreement and will not be available for future borrowings. The Company has the right to make voluntary prepayments of principal that would otherwise not be due, without penalty or premium but with accrued interest, at any time, and any amounts voluntarily prepaid will be available for future borrowings, so long as the Company is not in default under the 2002 Credit Agreement, and the outstanding principal balance loaned under the 2002 Credit Agreement does not exceed $300,000. At June 30, 2002, no amounts were outstanding under the 2002 Credit Agreement.
In connection with entering into the 2002 Credit Agreement on March 27, 2002, the Company issued to Mr. Kingsley warrants to purchase 30,000 shares of the Company’s common stock at $4.00 per share. The warrants are fully exercisable and non-forfeitable on the date of grant and expire on March 26, 2007. The fair value of the warrant was $60,390 and was determined using the Black-Scholes option pricing model with the following assumptions: contractual life of 5 years; risk-free interest rate of 4.4%; volatility of 84.6%; and no dividends during the expected term. The fair value of the warrant was included in other current assets at June 30, 2002, and is being amortized over the term of the 2002 Credit Agreement.
BioTime will need to obtain additional equity capital from time to time in the future, as long as the fees it receives from licensing its products to pharmaceutical companies, profits from sales of its products and/or royalty revenues are not sufficient to fund its operations. Sales of additional equity securities could result in the dilution of the interests of present shareholders. The amount of license fees and royalties that may be earned through the licensing and sale of the Company’s products and technology, the timing of the receipt of license fee payments, and the future availability and terms of equity financing, is uncertain. The unavailability or inadequacy of financing or revenues to meet future capital needs could force the Company to modify, curtail, delay or suspend some or all aspects of its planned operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company did not hold any market risk sensitive instruments as of June 30, 2002, December 31, 2001, or June 30, 2001.
18
PART II — OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
During August 2002, the Company sold 1,852,785 common shares at $1.12 per share. In connection with the offering, the Company granted to Ladenburg Thalmann Co., Inc., warrants to purchase 129,695 common shares at an exercise price of $1.34 per share. The shares and warrants were offered and sold without registration under the Securities Act of 1933, as amended, pursuant to the exemption provided in Section 4(2) and Rule 506 thereunder. The Company has agreed to register these shares for sale under the Securities Act of 1933, as amended.
Item 5. Other Information
On August 13, 2002, Ronald S. Barkin informed the Company that he has decided to resign from the board of directors. Mr. Barkin had served as a director since 1990, and as President of the Company from 1997 until April 1, 2002.
Item 6. Exhibits and Reports of Form 8-K
19
†Incorporated by reference to the Company’s Form 10-K for the fiscal year ended June 30, 1998.
+ Incorporated by reference to Registration Statement on Form S-1, File Number 33-44549 filed with the Securities and Exchange Commission on December 18, 1991, and Amendment No. 1 and Amendment No. 2 thereto filed with the Securities and Exchange Commission on February 6, 1992 and March 7, 1992, respectively.
# Incorporated by reference to Registration Statement on Form S-1, File Number 33-48717 and Post-Effective Amendment No. 1 thereto filed with the Securities and Exchange Commission on June 22, 1992, and August 27, 1992, respectively.
* Incorporated by reference to the Company’s Form 10-K for the fiscal year ended June 30, 1994.
^ Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 1997.
## Incorporated by reference to Registration Statement on Form S-8, File Number 333-30603 filed with the Securities and Exchange Commission on July 2, 1997.
20
^ ^ Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 1999.
### Incorporated by reference to the Company’s Form 8-K, filed April 24, 1997.
^^^ Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 1999.
‡ Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 1999.
†† Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2000.
‡‡ Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2001.
** Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2001.
*** Filed herewith.
The Company filed a report on Form 8-K on July 9, 2002, reporting under Item 5 — disclosing Canadian regulatory approval for the sale of Hextend in Canada.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BIOTIME, INC.
22
EXHIBIT INDEX