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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23678
BIOSPHERE MEDICAL, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 04-3216867
------------------------------- -----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Organization or Incorporation)
1050 Hingham St. Rockland, Massachusetts 02370
(Address of Principal Executive Offices) (Zip Code)
(781) 681-7900
(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
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The number of shares outstanding of the Registrants Common Stock as of
November 9, 2000: 10,480,922 shares.
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BioSphere Medical, Inc.
INDEX
Page
Part I - Financial Information
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of
September 30, 2000 and December 31, 1999
(Unaudited)..................................................... 3
Consolidated Condensed Statements of Operations for the
Three Months and Nine Months Ended September 30, 2000 and 1999
(Unaudited)..................................................... 4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999
(Unaudited)..................................................... 5
Notes to Unaudited Consolidated Condensed
Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................... 13
Part II - Other Information............................................. 14
Signatures................................................................ 15
Index to exhibits......................................................... 16
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,178 $ 5,368
Accounts receivable, net of allowance for
doubtful accounts of $58 and $0 as of
September 30, 2000 and December 31, 1999,
respectively 972 645
Inventories 569 389
Prepaid and other current assets 119 51
------------ ------------
Total current assets 18,838 6,453
Property and equipment, net 648 322
Goodwill, net 1,076 713
Other assets 264 8
------------ ------------
Total assets $ 20,826 $ 7,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 648 $ 616
Accrued compensation 753 400
Other accrued expenses 825 879
Payable to related party 10 68
Current portion of long-term debt 23 --
------------ ------------
Total current liabilities 2,259 1,963
Minority interest acquisition obligation 406 945
Long-term debt 100 --
------------ ------------
Total liabilities 2,765 2,908
Stockholders' equity:
Common stock, $0.01 par value, 25,000
shares authorized; shares issued and
outstanding: 10,481 as of September 30, 2000
and 8,456 as of December 31, 1999 105 84
Additional paid-in capital 59,920 40,587
Accumulated deficit (42,144) (36,068)
Cumulative translation adjustment 180 (15)
------------ ------------
Total stockholders' equity 18,061 4,588
------------ ------------
Total liabilities and stockholders' equity $ 20,826 $ 7,496
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Product revenues $ 1,016 $ 594 $ 2,605 $ 1,587
--------- --------- --------- ---------
Costs and expenses:
Cost of product revenues 375 382 1,061 956
Research and development 518 295 1,631 494
Selling, general and administrative (1) 1,836 1,008 5,234 2,773
Stock-based compensation to non-employee 991 -- 1,261 --
--------- --------- --------- ---------
Total costs and expenses 3,720 1,685 9,187 4,223
--------- --------- --------- ---------
Loss from continuing operations (2,704) (1,091) (6,582) (2,636)
Interest and other income, net 251 71 506 88
--------- --------- --------- ---------
Loss before taxes and minority interest (2,453) (1,020) (6,076) (2,548)
Income tax -- 20 -- --
--------- --------- --------- ---------
Loss before minority interest (2,453) (1,000) (6,076) (2,548)
Minority interest -- 21 -- 6
--------- --------- --------- ---------
Net loss from continuing operation (2,453) (979) (6,076) (2,542)
Loss from discontinued operations -- -- -- (539)
--------- --------- --------- ---------
Net loss $ (2,453) $ (979) $ (6,076) $ (3,081)
========= ========= ========= =========
Basic and diluted net loss per share from
continuing operations $ (0.24) $ (0.12) $ (0.64) $ (0.30)
Basic and diluted net loss per share from
discontinued operations -- -- -- (0.06)
--------- --------- --------- ---------
Basic and diluted net loss per share $ (0.24) $ (0.12) $ (0.64) $ (0.36)
========= ========= ========= =========
Weighted average common shares outstanding
Basic and diluted 10,103 8,456 9,428 8,456
========= ========= ========= =========
(1) Excludes compensation charge for issuance of stock options to non-employee advisors.
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ (6,076) $ (3,081)
Net loss
Less: Net loss from discontinued operations -- 539
--------- ---------
Net loss from continuing operations (6,076) (2,542)
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing
operating activities:
Provision for doubtful accounts 58 --
Depreciation and amortization 189 21
Minority interest- BioSphere Medical, S.A. -- (6)
Non-cash interest expense 20 --
Foreign currency translation gain (85) --
Non-cash Stock-based compensation to non-employees 1,261 --
Changes in operating assets and liabilities:
Accounts receivable (385) 44
Inventories (180) (58)
Prepaid and other current assets (185) 15
Accounts payable 32 209
Accrued compensation 353 (1)
Other accrued expenses (58) (394)
Payable to related party (54) (76)
--------- ---------
Net cash used in operating activities (5,110) (2,788)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (431) (158)
Increase in restricted cash -- (1,016)
Change in other assets (139) (1)
Cash paid for 34% interest of Biosphere Medical, S.A. (920) --
Proceeds from acquisition of Biosphere Medical, S.A. -- 283
--------- ---------
Net cash used in investing activities (1,490) (892)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash provided by the issuance of common stock in
private placements 17,734 --
Cash provided by the exercise of stock options 358 --
Net proceeds/(repayments) on long-term borrowings 123 (590)
Net proceeds/(repayments) under line of credit agreement -- (2,032)
--------- ---------
Net cash provided by (used in) financing activities 18,215 (2,622)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 195 (2)
--------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 11,810 (6,304)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 9,657
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,368 2,235
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,178 $ 5,588
========= =========
ACQUISITION OF 51% OF BIOSPHERE MEDICAL, S.A:
Liabilities Assumed $ -- $ (1,493)
Fair Value of Assets Acquired -- 1,493
Put Option of Minority Interest -- 771
---------- ---------
Goodwill $ -- $ 771
========== =========
</TABLE>
The accompanying notes are an integral part of the
consolidated condensed financial statements.
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BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Nature of Business
BioSphere Medical, Inc. (the "Company") was incorporated in Delaware in
December 1993 under the name BioSepra Inc. During 1999, the Company
strategically refocused its business on the development and commercialization of
its proprietary microspheres for medical applications. In February 1999, the
Company acquired a 51% ownership interest in Biosphere Medical S.A. ("BMSA"), a
French societe anonyme (See Note 3). BMSA retains the license to the
embolotherapy device that is the main focus of the Company's business. In May
1999, the Company sold substantially all of its assets relating to its former
core business, chromatography, and changed its name to BioSphere Medical, Inc.
In April 2000, the Company increased its ownership interest in BMSA from 51% to
85%. The Company has an option to acquire the remaining 15% at a later date.
The Company expects to spend substantial funds and experience continued
losses for the foreseeable future. As of September 30, 2000, Sepracor Inc., a
specialty biopharmaceutical company, beneficially owned approximately 56% of the
Company's outstanding common stock.
B) Basis of Presentation
The accompanying consolidated condensed financial statements are unaudited
and have been prepared on a basis substantially consistent with the Company's
annual audited financial statements included in the Company's Form 10-K. The
consolidated condensed financial statements include the accounts of the Company
and its majority-owned subsidiary, BMSA, and its wholly-owned subsidiary
Biosphere Medical Japan, Inc. (a Delaware Corporation established in April
2000). All material inter-company balances and transactions have been eliminated
in consolidation. Certain information and footnote disclosures normally included
in the Company's annual statements have been condensed or omitted. The
consolidated condensed financial statements, in the opinion of management,
reflect all adjustments (including normal recurring accruals) necessary for a
fair statement of the results for the three-month and nine-month periods ended
September 30, 2000 and 1999. The results of operations for the periods are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year. These consolidated condensed financial statements should be
read in conjunction with the audited financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
Certain prior period amounts have been reclassified to conform to current
reporting, including stock-based compensation to non-employees (see note 5) and
the impact of the operations of the Company that were discontinued (see Note 6).
C) New Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
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D) Comprehensive Income /(Loss)
The Company applies Statement of Financial Account Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income (loss) and its components in the
financial statements. The Company's only item of other comprehensive income
(loss) relates to foreign currency translation adjustments, and is presented
separately on the balance sheet as required. If presented on the statement of
operations, comprehensive loss due to foreign currency translation adjustments
would be approximately $195,000 less than reported for the nine months ended
September 30, 2000 and approximately $1,000 greater than reported for the nine
months ended September 30, 1999.
E) Net Loss Per Share
Basic net loss per share is calculated based on the weighted average number
of common shares outstanding during the period. Diluted net loss per share
incorporates the dilutive effect of common stock equivalent options, warrants
and other convertible securities. Total warrants and options convertible into
common stock as of September 30, 2000 and 1999, equaled 4,141,448 and 3,574,780,
respectively. Common stock equivalents have been excluded from the calculation
of weighted average number of diluted common shares, as their effect would be
antidilutive for all periods presented.
F) Revenue Recognition
The Company recognizes revenue from the sale of its products when the
products are shipped to its customers. Reserves for sales returns are provided
for potential returns at the time of revenue recognition.
2. INVENTORIES
Inventories are stated at the lower of cost or market and consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
(In Thousands) 2000 1999
-------------------------------------- ------------ ------------
<S> <C> <C>
Raw material $ 104 $ 119
Work in progress 44 25
Finished goods 421 245
------------ ------------
$ 569 $ 389
============ ============
</TABLE>
3. MINORITY INTEREST ACQUISITION OBLIGATION
On February 25, 1999, the Company acquired 51% of the outstanding capital
stock of BMSA. Accordingly, the results of operations of BMSA have been included
in the consolidated condensed statements as of the date of acquisition.
In accordance with a February 25, 1999 purchase agreement, the Company
acquired a 51% ownership interest by granting to BMSA an exclusive sales and
manufacturing license to certain patents and technology primarily relating to
the Company's Embosphere Microsphere technology. The Company was also granted an
option to purchase the remaining 49% interest in BMSA through December 31, 2004
for an amount equal to the product of the percentage interest to be purchased
and the sum of BMSA's rolling nine-month sales and worldwide Embosphere
Microsphere sales as of the date of exercise (the "Purchase Option"). Moreover,
the holder of the remaining 49% interest was also granted an option (the "Put
Option") to require the Company to purchase the remaining 49% interest from
December 31, 2003 until December 31, 2004 for an amount equal to the greater of
an agreed upon price (in French Francs) for each percentage interest to be sold
or the amount payable under the Purchase Option. The Put Option represents a
contingent purchase consideration and the Company is accreting the value of this
Put Option over the period ending December 31, 2003.
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On April 7, 2000, the Company purchased an additional 34% of BMSA for
approximately $920,000. The transaction was accounted for as a step acquisition
of a minority interest whereby the fair value in excess of the then recorded
accrued acquisition obligation was treated as an increase to goodwill. As a
result of this step-acquisition, the Company's total ownership interest in BMSA
increased to 85%. As of September 30, 2000, the holder of the 15% minority
interest retains its Put Option with respect to the remaining 15% of the
outstanding equity interest in BMSA pursuant to the terms of the original
purchase agreement. The Company also retains its Purchase Option with respect to
the remaining 15% equity interest in BMSA. As of September 30, 2000 the Company
estimated the present value of the Put Option to be $406,000.
The Company has applied the purchase method of accounting to the purchase of the
interest in BMSA and has allocated the purchase price to the assets acquired and
liabilities assumed. The purchase price in excess of the fair value of the
tangible assets has been allocated to goodwill. Goodwill as of September 30,
2000 and December 31, 1999 of $1,076,000 and $713,000, respectively, is being
amortized through February 2010.
4. RELATED PARTY TRANSACTIONS
The related party payable represents amounts due for certain administrative
services provided on an arms-length basis by Sepracor Inc., the Company's
majority stockholder.
5. STOCK-BASED COMPENSATION TO NON-EMPLOYEES
In connection with stock options previously issued to non-employee
advisors, the Company, in accordance with Emerging Issues Task Force Abstract
96-18 "Accounting for equity instruments that are issued to other than employees
for acquiring, or in conjunction with selling, goods or services" ("EITF
96-18"), recognized $270,000 in non-employee compensation expense during the
six-month period ended June 30, 2000. The $270,000 non-cash compensation expense
was previously charged to selling, general and administrative expense. Effective
September 30, 2000, the Company's Board of Directors authorized the Company to
accelerate the vesting of all non-employee advisor's stock options subject to
EITF 96-18 fair value accounting principles. Accordingly, in the three months
ended September 30, 2000, an additional $991,000 in non-cash compensation
expense was recorded. The total stock-based compensation charge has been
presented as a separate line item within the Statement of Operations for both
the three months and nine months ended September 30, 2000. The $1,261,000
aggregate fair value of the non-employee stock options was derived from the
Black-Scholes option-pricing model.
6. DISCONTINUED OPERATIONS
On May 17, 1999, the Company sold substantially all of its assets relating
to its former core business, chromatography, for approximately $11.0 million in
cash, and the assumption of certain liabilities. Upon the consummation of the
sale, the Company changed its name from BioSepra Inc. to BioSphere Medical, Inc.
The Company utilized a portion of the proceeds to pay approximately $880,000 of
transaction costs, to repay approximately $2.0 million of outstanding bank debt,
and to repay approximately $143,000 due to Sepracor.
The net assets included in the sale had a net book value of approximately
$10.5 million on May 17, 1999, which was included in calculating a net loss from
the sale of approximately $70,000. The operations, assets and liabilities of the
business have been presented in accordance with Accounting Principles Board
(APB) Opinion No. 30, Reporting the Results of Operations--Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, in the accompanying consolidated
financial statements. Accordingly, the operating results of the discontinued
business for the three and nine months ended September 30, 1999 have been
segregated from the continuing operations and reported as a separate line item
on the consolidated condensed statements of operations.
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7. COMMON STOCK FINANCING
On February 4, 2000, the Company completed a private equity placement of
common stock and warrants for net proceeds of approximately $5.9 million.
Investors purchased 653,887 shares of the Company's common stock at a price of
$9.00 per share, which included warrants to purchase up to an additional 163,468
shares of common stock. Of the total 653,887 common shares sold, unrelated
third-party institutional investors purchased 609,445, or 93%, and 44,442, or
7%, were purchased by executive officers and members of the Company's Board of
Directors. The warrants have an exercise price equal to $20.00 per share and
expire on February 4, 2005. In accordance with the Black-Scholes option-pricing
model, the Company valued the warrants at approximately $929,000 and included
such amount as a component of additional paid-in capital. The Company intends to
use the net proceeds from this private placement for general corporate purposes,
including research and development, sales and marketing activities.
On July 28, 2000, the Company completed a private equity placement of
common stock for net proceeds of approximately $11.8 million. Investors
purchased 1,214,900 shares of common stock at $11.00 per share. Of the total
shares sold, Sepracor Inc., the Company's parent company, purchased 454,545
shares, thereby decreasing its majority ownership to 56%. The Company intends to
use the net proceeds from this private placement for general corporate purposes,
including research and development, sales and marketing activities.
8. SHARES AUTHORIZED UNDER THE COMPANY'S 1997 STOCK INCENTIVE PLAN
On September 15, 2000, the Board of Directors approved, subject to
stockholder approval, an amendment to the 1997 Stock Incentive Plan, as amended,
to increase the number of reserved shares of common stock available for future
issuance under the plan from 3,125,000 shares to 5,000,000 shares.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. For this
purpose, statements contained herein that are not statements of historical fact
may be deemed forward-looking statements. Without limiting the foregoing, the
word "believes," "anticipates," "plans," "expects," "estimates," "intends,"
"may," "should," "will," "would" and similar expressions are intended to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties and are not guarantees of future performance. Actual
results may differ materially from those indicated in such forward-looking
statements as a result of certain important factors including, but not limited
to, those discussed under the heading "Factors Affecting Future Operating
Results" in the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000, which discussion is attached hereto as Exhibit 99.1.
RESULTS OF OPERATIONS
OVERVIEW
BioSphere Medical, Inc., (the "Company") develops, markets and manufactures
innovative medical device products for the treatment of hypervascularized tumors
or arteriovenous malformations using embolotherapy. Embolotherapy is a minimally
invasive procedure in which materials that inhibit blood flow, referred to as
embolic materials, such as our microspheres, are injected through a hollow,
flexible tube called a catheter into the blood vessels to inhibit blood flow to
tumors and arteriovenous malformations. By selectively blocking the tumor's
blood supply, embolotherapy is designed to cause the tumor to shrink.
Hypervascularized tumors are tumors that are supplied by a larger number of
blood vessels than the number of blood vessels supplying the tissue surrounding
the tumor. Arteriovenous malformations are abnormal connections between arteries
and veins, frequently characterized by a dense and wide-spread network of
interconnecting blood vessels. Our lead product, EmboSphere Microspheres, is an
acrylic bead with a proprietary design that is used as an embolic material.
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In April 2000, the Company received clearance from the United States Food
and Drug Administration, or FDA, for embolization of hypervascularized tumors
and arteriovenous malformations. The Company has recently commenced Phase II
clinical testing under an investigational device exemption to support FDA
clearance for specific product promotion in uterine artery embolization
indications using our Embosphere Microspheres. An investigational device
exemption is a regulatory exemption granted by the FDA to medical device
manufacturers for the purpose of conducting clinical studies. We intend, pending
FDA clearance for this indication, to promote our microspheres for the treatment
of uterine fibroids. We do not anticipate receiving this clearance before 2002,
if at all.
We received CE Mark approval of our Embosphere Microspheres product in the
European Union in 1997. CE Mark Approval is a certification granted by European
regulatory bodies, or by some manufacturers with satisfactory quality systems,
that substantiates the compliance of products with specific standards of quality
and/or safety. This approval is generally required prior to the
commercialization of a medical device in the European Union. In January 2000, we
received marketing approval of our Embosphere Microspheres product in Australia
and Canada. We expect to file for marketing approval in Japan for our Hepasphere
Microspheres product for the treatment of liver cancer within the next 36
months.
During the nine-month period ended September 30, 2000, we continued the
implementation of our new strategic plan to develop our Embosphere Microspheres
for the treatment of hypervascularized tumors and arteriovenous malformations.
Our revenue is primarily generated from product sales of Embosphere Microspheres
in the United States, European Union, Australia, and Canada. Product revenues
also include the sale of barium and other ancillary products manufactured by us
or by third parties.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Product revenue increased to $1,016,000 for the three-month period ended
September 30, 2000 from $594,000 for the same period in 1999. Revenue for the
nine-month period ended September 30, 2000 increased to $2,605,000 from
$1,587,000 for the same period in 1999. The $422,000 increase in the three-month
period is primarily attributable to the initiation of Embosphere Microsphere
sales in the U.S. following receipt of FDA 510(k) clearance in April 2000. The
$1,018,000 increase in the nine months ended September 30, 2000, resulted from
increased sales in the U.S., Australia, Canada, and European Union of the
Company's Embosphere Microsphere product line and other ancillary products. To a
lesser extent, the increase in product revenues for the nine months ended
September 30, 2000 was due to the acquisition of BMSA in February of 1999,
whereby only 8 months of revenue was recognized during 1999.
Cost of product revenues for the three-month period ended September 30,
2000 was $375,000, compared with $382,000, for the same period in 1999. For the
nine-month period ended September 30, 2000, cost of product revenues was
$1,061,000 compared with $956,000 for the same period in 1999. The $105,000
increase in the cost of product revenues in the nine-month period ended
September 30, was due to increased sales volume partially offset by a shift in
the sales mix to more Embosphere Microsphere products.
Gross margin for the three-month period ended September 30, 2000 was
$641,000 (63% of revenues) compared with $212,000 (36% of revenues) for the same
period in 1999. Gross margin for the nine-month period ended September 30, 2000
was $1,544,000 (59% of revenues) compared with $631,000 (40% of revenues) for
the nine-month period ended September 30, 1999. The increase in both the
three-month and nine-month period margin was attributable to a shift in product
sales mix to the higher margin Embosphere Microsphere products, complemented by
the full integration of the Embosphere Microsphere manufacturing process at the
Company's French production facility in the spring of 2000.
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Research and development expenses increased to $518,000 in the three months
ended September 30, 2000 from $295,000 in the same period in 1999. For the
nine-month period ended September 30, 2000, research and development expenses
were $1,631,000 compared with $494,000 in the nine months ended September 30,
1999. The $223,000 and $1,137,000 increase in the three months and nine months
ended September 30, 2000, respectively, was due primarily to clinical and
regulatory expenses incurred relative to seeking Embosphere Microsphere
regulatory approval in the United States. The Company anticipates future
research and development expenses will increase as a result of the advancement
of Embosphere Microsphere products through its recently initiated Phase II
clinical trial for the uterine artery embolization treatment of uterine fibroids
under an investigational device exemption granted by the FDA.
Selling, general and administrative expenses, net of non-employee stock
option acceleration charges, increased to $1,836,000 for the three months ended
September 30, 2000 from $1,008,000 for the comparable period in 1999. In the
nine-month period ended September 30, 2000, selling, general and administrative
expenses increased to $5,234,000 from $2,773,000 in 1999. The $828,000 and
$2,461,000 increase in the three-month and nine-month periods ended September
30, 2000, respectively, was primarily due to the implementation of the Company's
product commercialization plan, including personnel costs, recruiting expenses
and other expenses associated with developing a new business.
In connection with stock options previously issued to non-employee
advisors, the Company, in accordance with Emerging Issues Task Force Abstract
96-18 "Accounting for equity instruments that are issued to other than employees
for acquiring, or in conjunction with selling, goods or services" ("EITF
96-18"), recognized $270,000 in non-employee compensation expense during the
six-month period ended June 30, 2000. The $270,000 non-cash compensation expense
was previously charged to selling, general and administrative expense. Effective
September 30, 2000, the Company's Board of Directors authorized the Company to
accelerate the vesting of all non-employee advisor's stock options subject to
EITF 96-18 fair value accounting principles. Accordingly, in the three months
ended September 30, 2000, an additional $991,000 in non-cash compensation
expense was recorded. The total stock-based compensation charge has been
presented as a separate line item within the Statement of Operations for both
the three months and nine months ended September 30, 2000. The $1,261,000
aggregate fair value of the non-employee stock options was derived from the
Black-Scholes option-pricing model.
Interest and other income, net, in the three-month period ended September
30, 2000 was $251,000 compared to $71,000 in the comparable period in 1999. In
the nine-month period ended September 30, 2000, interest and other income, net,
was $506,000 compared with $88,000 in the same period in 1999. The increases
were due to interest earned on invested funds received as a result of the May
1999 sale of the Company's discontinued chromatography operations and the
proceeds from the Company's February 4, 2000 and July 28, 2000 private equity
placements.
The Company's net loss from continuing operations increased to $2,453,000
for the three months ended September 30, 2000 compared with $979,000 for the
three months ended September 30, 1999. Net loss from continuing operations
increased to $6,076,000 in the nine-month period ended September 30, 2000 from
$3,081,000 in the same period in 1999. The increases in both three-month and
nine-month periods were due to expenditures related to the Company's strategic
plan, including additions to the management team and infrastructure, as well as
clinical and regulatory expenses related to the further development and
continued commercialization of its Embosphere Microspheres product.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations from product sales, net
proceeds provided from public and private equity offerings, funds provided by
the sale of the Company's former chromatography business, funds provided by
Sepracor, bank financing, equipment financing leases and to a lesser extent,
exercise of stock options. As of September 30, 2000, the Company had $17,178,000
of cash and cash equivalents and $16,579,000 of net working capital. Cash and
cash equivalents for the nine months ended September 30, 2000 increased by
$11,810,000 from $5,368,000 at December 31, 1999.
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For the nine months ended September 30, 2000, the Company used $5,109,000
in operating cash primarily to fund its marketing and product development
activities, build inventory for its U.S. product commercialization, and finance
working capital requirements for product sales in the United States. Cash used
in operations is expected to increase to support the Company's further
operational and product development efforts.
Net cash used in investing activities was $1,490,000 for the nine months
ended September 30, 2000. Of this amount, $920,000 was used in connection with
the April 2000 purchase of an additional 34% equity interest in the Company's
majority- owned subsidiary, BMSA. As a result of this step-acquisition, the
Company's total ownership interest in BMSA was increased to 85%.
Property and equipment and other asset purchases of $431,000 and $139,000,
respectively, made in the nine-month period ended September 30, 2000 related to
establishing full manufacturing capabilities in BMSA as well as obtaining office
equipment and furnishings in the Company's new corporate headquarters in
Rockland, Massachusetts. Future capital expenditures are anticipated to increase
over the next twelve-month period consistent with the Company's plan to expand
its sales and marketing force in the United States, Australia and Canada. If
available on favorable terms, the Company expects to finance certain future
fixed asset acquisitions through leasing arrangements.
Net cash provided by financing activities was $18,214,000 for the nine
months ended September 30, 2000. In February 2000 and July 2000, the Company
completed two private-equity placements resulting in the issuance of an
aggregate 1,868,787 shares of Common Stock for aggregate net proceeds of
approximately $17,734,000. In connection with the February 2000 private-equity
issuance, warrants to purchase an aggregate of 163,468 shares of Common Stock
were issued at an exercise price of $20. These warrants expire on February 4,
2005. Cash provided by financing activities also includes $358,000 received in
connection with the sale of approximately 156,000 shares of common stock through
the exercise of options granted under the Company's incentive stock option plan.
Additionally, in March 2000, BMSA entered into a 1,000,000 French Franc
($134,000 equivalent as of September 30, 2000) term loan with Banque Populaire
that is payable over five years, and accrues interest at 5.4% per annum.
The Company, in collaboration with Sepracor, has available a revolving
credit agreement with a bank under which the Company may borrow up to $2.0
million, subject to limitations defined in the agreement and on borrowings
outstanding by Sepracor. There was no indebtedness outstanding under this
agreement as of September 30, 2000. Interest on the outstanding borrowings is
payable monthly in arrears at prime (9.5% as of September 30, 2000) or the LIBOR
rate (6.69% at September 30, 2000) plus 0.75%. The Company is required to pay a
commitment fee equal to 0.25% per annum on the average available unused line.
The ability to borrow under this credit line is dependent upon Sepracor's
maintenance of certain financial ratios and levels of cash and cash equivalents
and tangible capital bases. Sepracor is guarantor of any amounts outstanding
under the agreement. The Company has entered into a security agreement with
Sepracor pursuant to which it has pledged to Sepracor all of its U.S. assets,
including its equity ownership of BMSA, as collateral for Sepracor's guarantee
to the bank. BMSA is not a party to the agreement with Sepracor and, therefore,
has not pledged its assets to the bank. The revolving credit agreement is
available until December 31, 2000. Upon expiration of the current revolving
credit agreement on December 31, 2000, the Company intends to negotiate a new
revolving credit agreement containing similar terms, rates and conditions.
The Company believes that its existing funds and working capital will be
sufficient to fund its operating and capital requirements as currently planned
at least through the next twelve-month period. However, the Company's cash
requirements may vary materially from those now planned because of the results
of research and development, the scope and results of pre-clinical and clinical
testing, changes in the focus and direction of its research and development
programs, competitive and technological advances, the FDA's regulatory process,
the market's acceptance of any approved products, and other factors.
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The Company expects to incur substantial additional costs, including costs
related to ongoing research and development activities, pre-clinical studies,
clinical trials, the expansion of its laboratory and administrative activities
and cost relating to its commercialization activities. The Company may also need
additional funds for possible strategic acquisitions of synergistic businesses,
products, technologies or upon exercise of the Put Option. These additional
funds may be raised from time to time through public or private sales of equity,
through borrowings, or through other financings. There are no assurances that
the Company will be able to obtain any additional funding that it may require on
acceptable terms, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to market risk in the form of interest rate risk and
foreign currency risk. The Company's investments in short-term cash equivalents
are subject to interest rate fluctuations. We do not believe that these
exposures are material. The Company sells and distributes its products worldwide
and the payables may be due in French currency or other local currencies.
Therefore, the Company may experience gains or losses upon the payment of these
inter-company obligations.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) Recent Sales of Unregistered Securities
On July 28, 2000, BioSphere Medical, Inc. completed its sale of
1,214,900 shares of its Common Stock at a purchase price of $11.00
per share for aggregate net proceeds of approximately $11.8
million. The group of investors that participated in the financing
included Sepracor Inc., the Company's majority interest
shareholder. The Common Stock was issued in reliance upon the
exemptions from registration under Section 4(2) of the Securities
Act of 1933, as amended, or Regulation D promulgated thereunder,
relative to sales by an issuer not involving any public offering.
The Company intends to use the proceeds are to be used to fund
current operations.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
27. Financial Data Schedule
99.1 Pages 14 to 23 of the Company's quarterly report on Form
10-Q for the quarterly period ended June 30, 2000, which are
deemed to be filed solely with respect to the section titled
"Factors Affecting Future Operating Results."
b) Reports on Form 8-K
Current report on Form 8-K dated July 28, 2000.
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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.
BioSphere Medical, Inc.
Date: November 13, 2000 /s/ Robert M. Palladino
-----------------------------------------
Robert M. Palladino
Chief Financial Officer
(Principal Financial & Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -------------------------
27 Financial Data Schedule
99.1 "FACTORS AFFECTING FUTURE OPERATING RESULTS."
BIOSPHERE MEDICAL, INC. IS FILING PAGES 14 TO 23 OF THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2000, WHICH ARE DEEMED TO BE FILED SOLELY WITH
RESPECT TO THE SECTION TITLED "FACTORS AFFECTING FUTURE OPERATING
RESULTS."
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