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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: June 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
July 28, 2000: 10,470,922 shares.
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BioSphere Medical, Inc.
INDEX
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 2000 and December 31, 1999 (Unaudited).................3
Consolidated Condensed Statements of Operations for the
Three-Month and Six-Month Periods Ended June 30, 2000
and 1999 (Unaudited)............................................4
Consolidated Condensed Statements of Cash Flows for the
Six-Month Periods Ended June 30, 2000 and 1999 (Unaudited)......5
Notes to Consolidated Condensed Financial Statements............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.....................................................24
Part II - Other Information.............................................24
Signatures................................................................26
Index to exhibits.........................................................27
2
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,929 $ 5,368
Accounts receivable, net of allowance for
doubtful accounts of $43 and $0 as of
June 30, 2000 and December 31, 1999,
respectively 672 645
Inventories 639 389
Prepaid and other current assets 151 51
------------ ------------
Total current assets 8,391 6,453
Property and equipment, net 551 322
Goodwill, net 1,108 713
Other assets 646 8
------------ ------------
Total assets $ 10,696 $ 7,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 692 $ 616
Payable to Sepracor 6 68
Accrued expenses 2,028 1,279
Current portion of long-term debt 27 --
------------ ------------
Total current liabilities 2,753 1,963
Minority interest acquisition obligation 406 945
Long-term debt 111 --
------------ ------------
Total liabilities 3,270 2,908
Stockholders' equity:
Common stock, $0.01 par value, 25,000
shares authorized; issued and
outstanding: 9,256 as of June 30, 2000
and 8,456 as of December 31, 1999 93 84
Additional paid-in capital 46,983 40,587
Accumulated deficit (39,691) (36,068)
Cumulative translation adjustment 41 (15)
------------ ------------
Total stockholders' equity 7,426 4,588
============ ============
Total liabilities and stockholders' equity $ 10,696 $ 7,496
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
3
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Product revenue $ 815 $ 713 $ 1,589 $ 993
Costs and expenses:
Cost of product revenue 404 428 686 574
Research and development 564 182 1,113 199
Selling, general and administrative 2,118 1,141 3,668 1,744
--------- --------- --------- ---------
Total costs and expenses 3,086 1,751 5,467 2,517
--------- --------- --------- ---------
Loss from continuing operations (2,271) (1,038) (3,878) (1,524)
Other income/ (expense) 104 16 255 (5)
--------- --------- --------- ---------
Loss before taxes and minority interest (2,167) (1,022) (3,623) (1,529)
Income tax -- (2) -- (20)
--------- --------- --------- ---------
Loss before minority interest (2,167) (1,024) (3,623) (1,549)
Minority interest 20 (1) -- (15)
--------- --------- --------- ---------
Net loss from continuing operation (2,147) (1,025) (3,623) (1,564)
Loss from discontinued operations -- (103) -- (539)
--------- --------- --------- ---------
Net loss $ (2,147) $ (1,128) $ (3,623) $ (2,103)
========= ========= ========= =========
Basic and diluted net loss per share from
continuing operations $ (0.23) $ (0.12) $ (0.40) $ (0.19)
Basic and diluted net loss per share from
discontinued operations -- (0.01) -- (0.06)
--------- --------- --------- ---------
Basic and diluted net loss per share $ (0.23) $ (0.13) $ (0.40) $ (0.25)
========= ========= ========= =========
Weighted average common shares outstanding
Basic and diluted 9,250 8,456 9,087 8,456
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
4
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ (3,623) $ (2,103)
Net loss
Less: Net loss from discontinued operations -- 539
--------- ---------
Net loss from continuing operations (3,623) (1,564)
Adjustments to reconcile net loss from continuing
operations to net cash used in continuing
operating activities:
Provision for doubtful accounts 43 --
Depreciation and amortization 118 20
Minority interest- BioSphere Medical, S.A. -- 15
Non-cash interest expense 20 --
Foreign currency translation gain (85) --
Stock-based compensation 270 --
Changes in operating assets and liabilities:
Accounts receivable (70) 40
Inventories (250) (20)
Prepaid and other current assets (100) (24)
Accounts payable 76 (72)
Payable to Sepracor (62) (384)
Accrued expenses 736 9
--------- ---------
Net cash used in operating activities (2,927) (1,980)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (296) (64)
Increase in restricted cash -- (1,000)
Change in other assets (138) 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 (1,354) (780)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash provided by the issuance of common stock in a
private placement 5,785 --
Cash provided by the exercise of stock options 350 --
Deferred financing costs (500) --
Net proceeds from long-term borrowings 138 --
Net Proceeds/(payments) under line of credit agreement 13 (2,000)
Payments made on capital lease obligations -- (180)
--------- ---------
Net cash provided by financing activities 5,786 (2,180)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 56 (5)
--------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 1,561 (4,945)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 9,655
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,368 2,235
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,929 $ 6,945
========= =========
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.
5
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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. 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 has 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 Biosphere Medical, S.A. to 85%. The Company has an option
to acquire the remaining 15% at a later date. The Company expects to spend
substantial funds and to experience increasing losses for the foreseeable future
in connection with this refocus of its business and execution of its business
plan. As of August 1, 2000, Sepracor Inc., a specialty pharmaceutical company,
beneficially owned approximately 56% of our 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 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 subsidiary, BMSA. All material intercompany 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
six-month periods ended June 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 the impact of the operations of the Company that were
discontinued.
C) New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. The effective date of this
bulletin was deferred until the fourth fiscal quarter beginning after December
15, 1999. SAB 101 requires companies to report any changes in revenue
recognition as a cumulative change in accounting principle at the time of
implementation in accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes." Adoption of SAB 101 is not expected to have a material
impact on the Company's financial position and results of operations.
6
<PAGE> 7
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 is
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.
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 $56,000 less than reported for the six months ended June
30, 2000 and approximately $1,000 greater than reported in the six months ended
June 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 June 30, 2000 and 1999, equaled 4,112,448 and 3,252,736,
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. BALANCE SHEET CAPTIONS
Components of other selected captions in the condensed consolidated balance
sheet consist of the following:
7
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<TABLE>
<CAPTION>
June 30, December 31, December 31,
(In Thousands) 2000 1999 1998
-------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
TRADE ACCOUNTS RECEIVABLE
Accounts receivable $ 715 $ 645 $ -
Allowance for doubtful accounts (43) - -
--------- --------- ---------
$ 672 $ 645
========= ========= =========
INVENTORIES
Raw material $ 112 $ 119 $ -
Work in progress 39 25 -
Finished goods 488 245 -
--------- --------- ---------
$ 639 $ 389 -
========= ========= =========
PROPERTY AND EQUIPMENT
Office equipment $ 493 $ 289 $ 77
Laboratory and manufacturing equipment 120 72 -
Leasehold improvements 89 45 -
--------- --------- ---------
702 406 77
Less accumulated depreciation (151) (84) (35)
--------- --------- ---------
$ 551 $ 322 42
========= ========= =========
GOODWILL
Excess of cost over net assets acquired $ 1,217 $ 771 $ -
Less accumulated amortization (109) (58) -
--------- --------- ---------
$ 1,108 $ 713 -
========= ========= =========
ACCRUED EXPENSES
Accrued compensation $ 910 $ 400 $ 161
Accrued private placement equity costs 315 - -
Accrued research and development costs 150 - -
Other 653 879 631
--------- --------- ---------
$ 2,028 $ 1,279 792
========= ========= =========
</TABLE>
3. MINORITY INTEREST ACQUISITION OBLIGATION
On February 25, 1999, the Company acquired 51% of the outstanding common
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(TM) Microsphere technology. The Company was also
granted an option to purchase the remaining 49% interest in BSMA 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.
8
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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 June 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 June 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 June 30,
2000 and December 31, 1999 of $1,108,000 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. DISCONTINUED OPERATIONS
On May 17, 1999, the Company sold substantially all of its assets and
business, 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 for
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 six months ended June 30, 1999 have been segregated
from the continuing operations and reported as a separate line item on the
consolidated condensed statements of operations.
6. COMMON STOCK FINANCING
On February 4, 2000, the Company completed a private equity placement of
common stock and warrants for net proceeds of approximately $5,785,000.
Investors purchased 653,887 shares of the Company's common stock at a price of
$9.00 per share, that included warrants to purchase up to an additional 163,468
shares of common stock. 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 has 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.
7. SALES BY REGIONAL AREA
Sales from continuing operations by geographic region for the years ended
December 31, 1999 and 1998 are as follows;
9
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<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
France 86% 100%
Spain 5 -
All other 9 -
-------- --------
-------- --------
100% 100%
======== ========
</TABLE>
8. SUBSEQUENT EVENT
On July 28, 2000, the Company completed a private equity placement of
common stock for gross proceeds of approximately $13,364,000. 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. All proceeds from this equity placement are to be used for general
corporate purposes, including research and development, sales and marketing
activities.
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," "intend,"
"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 factors including, but not limited to, those
set forth under the heading "Factors Affecting Future Operating Results".
RESULTS OF OPERATIONS
OVERVIEW
BioSphere Medical, Inc., (the "Company", "we" or "our") 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, we received clearance from the United States Food and Drug
Administration, or FDA, for embolization of hypervascularized tumors and
arteriovenous malformations. We have commenced clinical testing under an
investigational device exemption to support FDA clearance for specific 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 24
months.
During the six-month period ended June 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 currently generated from product sales of Embosphere Microspheres
in the United States, European Union, Australia, and Canada and the sale of
barium and other ancillary products manufactured by us or by third parties.
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Product revenue increased to $815,000 for the three-month period ended June
30, 2000 from $713,000 for the same period in 1999. Revenue for the six-month
period ended June 30, 2000 increased to $1,589,000 from $993,000 for the same
period in 1999. The 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. For the six-months ended June 30, 2000,
revenue increases resulted from increased sales in the U.S., Australia, Canada,
and Europe of its Embosphere Microsphere products and other ancillary products.
Cost of products sold for the three-month period ended June 30, 2000 was
$404,000 compared with $428,000 for the same period in 1999. For the six-month
period ended June 30, 2000 cost of products sold was $686,000 compared to
$574,000 in the six months ended June 30, 1999. The decrease in the three-month
period is attributable to a shift in the product mix to the lower cost
Embosphere Microspheres products. The increase in the costs of products sold in
the six-month period ended June 30, was due to increased sales volume partially
offset by a shift in the sales mix to more Embosphere products.
Gross margin for the three-month period ended June 30, 2000 was $411,000
(50% of revenues) compared with $285,000 (40% of revenues) for the same period
in 1999. Gross margin for the six-month periods ended June 30, 2000 was $903,000
(57% of revenues) in 2000 compared with $419,000 (42% of revenues) in the
six-month period ended June 30, 1999. The increase in both the three-month and
six-month period margin was attributable to lower raw material costs, a shift in
product sales mix and the full integration of the manufacturing process of
Embosphere Microspheres at the Company's French production facility.
11
<PAGE> 12
Research and development expenses increased to $564,000 in the three months
ended June 30, 2000 from $182,000 in the same period in 1999. For the six-month
period ended June 30, 2000 research and development expenses were $1,113,000
compared with $199,000 in the six months ended June 30, 1999. This increase in
both the three months and six months ended June 30, 2000 is due primarily to
clinical and regulatory expenses incurred relative to seeking initial and
subsequent Embosphere product indication approval in the United States. The
Company anticipates future research and development expenses will result from
the advancement of Embosphere Microspheres through its ongoing Phase I clinical
trial for the uterine artery embolization ("UAE") treatment of uterine fibroids
under an investigational device exemption granted by the FDA.
Selling, general and administrative expenses increased to $2,118,000 for
the three months ended June 30, 2000 from $1,141,000 for the comparable period
in 1999. In the six-month period ended June 30, 2000 selling, general and
administrative expenses increased from $1,744,000 in 1999 to $3,668,000 in 2000.
The increase in both the three-month and six-month periods is 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. Moreover, in the six-month period ended June 30,
2000, the Company incurred approximately $220,000 in non-cash compensation
expense resulting from warrants granted to consultants. Selling, general and
administrative costs are anticipated to increase in future periods to support
the Company's commercialization of its Embosphere Microsphere product lines.
Other income, net, in the three-month period ended June 30, 2000 was
$104,000 as compared to $16,000 in the comparable period in 1999. In the
six-month period ended June 30, 2000, other income/(expense), net, was $255,000
compared with $(5,000) in the same period in 1999. Both three-month and
six-month period 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 private equity
placement on February 4, 2000.
The Company's net loss from continuing operations increased to $2,147,000
for the three months ended June 30, 2000 compared with $1,025,000 for the three
months ended June 30, 1999. Net loss from continuing operations increased from
$1,564,000 in the six-month period ended June 30, 1999 to $3,623,000 in the same
period in 2000. The increases in both three-month and six-month periods are 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 development and continued commercialization of its
Embosphere Microspheres product.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations from product sales,
license fees, net proceeds provided from public and private equity offerings,
funds provided by Sepracor, bank financing, equipment financing leases and to a
lesser extent, exercise of stock options. As of June 30, 2000, the Company had
$6,929,000 of cash and cash equivalents and $5,638,000 of working capital. Cash
and cash equivalents for the six months ended June 30, 2000 increased by
$1,561,000 from $5,368,000 at December 31, 1999. Additionally, on July 28, 2000,
the Company completed a private equity placement of common stock for gross
proceeds of approximately $13,364,000. Investors purchased 1,214,900 shares of
common stock at $11.00 per share. All proceeds from this equity placement are to
be used for general corporate purposes, including research and development,
sales and marketing activities.
For the six months ended June 30, 2000, the Company used $2,926,000 in
operating cash primarily to fund its strategic 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 in the near term in support of the
Company's further sales, marketing and product development efforts.
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Net cash used in investing activities was $1,354,000 in the six months
ended June 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%.
Fixed assets and other asset purchases of $296,000 and $139,000,
respectively, made in the six-month period ended June 30, 2000 related to
establishing full manufacturing capabilities in the French subsidiary and
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 such future fixed asset acquisitions through long-term leasing
arrangements.
Net cash provided by financing activities was $5,786,000 for the six months
ended June 30, 2000. In February 2000, the Company completed a private equity
placements resulting in the issuance of 653,887 shares of Common Stock and
warrants to purchase an aggregate 163,468 shares of Common Stock at $20 for net
proceeds of approximately $5,785,000. The company also received $350,000 from
the sale of approximately 136,000 shares of common stock through the exercise of
options granted under the Company's incentive stock option plan. In March, 2000,
the Company's French subsidiary, Biosphere Medical SA, entered into a 1,000,000
French Franc ($145,000 equivalent on June 30, 2000) term loan with Banque
Populaire that is payable over five years, and accrues interest at 5.4% per
annum. Offsetting total cash inflows from financing activities was $500,000 in
cash expenditures incurred in the six months ended June 30, 2000 relating to the
July 28, 2000 private placement of 1,214,900 shares of the Company's Common
Stock.
As of June 30, 2000 and through December 31, 2000, 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 June 30, 2000.
Interest on the outstanding borrowings is payable monthly in arrears at prime
(9.5% as of June 30, 2000) or the LIBOR rate (6.69% at June 30, 2000) plus
0.75%. We are required to pay a commitment fee equal to 0.25% per annum on the
average unused line available to us. Our 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. We have entered into a
security agreement with Sepracor pursuant to which we have pledged to Sepracor
all of our assets, including our equity ownership of Biosphere Medical S.A., as
collateral for Sepracor's guarantee to the bank. Bioshpere Medical S.A. is not a
party to the agreement with Sepracor and, therefore, has not pledged its assets
to the bank.
The Company believes that its existing funds, including the funds
subsequently received in the July 2000 private equity placement, will be
sufficient to fund its operating and capital requirements as currently planned
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 our 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.
Factors Affecting Future Operating Results
The following important factors, among other things, could cause BioSphere
Medical, Inc.'s actual operating results to differ materially from those
indicated or suggested by forward-looking statements made in this Form 10-Q or
presented elsewhere by management from time to time.
RISK RELATING TO OUR FUTURE PROFITABILITY
BECAUSE WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN,
OUR COMMON STOCK IS A HIGHLY SPECULATIVE INVESTMENT
We have incurred operating losses since our inception and, as of June 30,
2000, had an accumulated deficit of approximately $39.7 million. We expect to
spend substantial funds to continue research and product testing, to establish
sales, marketing, quality control, regulatory and administrative capabilities,
and for other general corporate purposes. We expect to incur increasing losses
over the next several years as we expand our commercialization efforts.
We may never become profitable. If we do become profitable, we may not
remain profitable on a continuing basis. Our failure to become and remain
profitable would depress the market price of our common stock and impair our
ability to raise capital and continue our operations.
RISKS RELATING TO REGULATORY MATTERS
IF WE DO NOT OBTAIN THE REGULATORY APPROVALS REQUIRED TO MARKET AND SELL OUR
PRODUCTS, THEN OUR BUSINESS WILL BE UNSUCCESSFUL AND THE MARKET PRICE OF OUR
STOCK WILL SUBSTANTIALLY DECLINE
We are subject to governmental regulation by national and local government
agencies in the United States and abroad with respect to the manufacture,
packaging, labeling, advertising, promotion, distribution and sale of our
products. For example, our products are subject to approval or clearance by the
FDA prior to marketing in the United States for commercial use. The process of
obtaining necessary regulatory approvals and clearances will be time-consuming
and expensive for us. If we do not receive required regulatory approval or
clearance to market our products, we will not be able to develop and
commercialize our products and become profitable, and the value of our common
stock will substantially decline.
We are focusing our immediate product commercialization efforts on our
Embosphere Microspheres. In April 2000, we obtained marketing clearance from the
FDA to use our Embosphere Microspheres in the United States for the embolization
of hypervascularized tumors and arteriovenous malformations. However, we will
require FDA clearance of either a premarket notification under Section 510(k) of
the Federal Food, Drug and Cosmetic Act, which we refer to as a 510(k)
notification, or approval of a premarket approval application under Section 515
of the Federal Food, Drug and Cosmetic Act, which we refer to as a premarket
approval, before we can market Embosphere Microspheres in the United States for
use in the embolization of uterine fibroids. We do not expect to receive the
required clearance for uterine fibroids until 2002, if at all. In either case,
the FDA will require us to undertake clinical trials, which may be lengthy and
expensive. We currently do not have regulatory approvals or clearances to market
any other product in any country, other than approvals to market our Embosphere
Microspheres in the European Union, Australia and Canada for the treatment of
arteriovenous malformations, hypervascularized tumors and blood loss.
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IF THE FDA OR OTHER REGULATORY AGENCIES PLACE RESTRICTIONS ON, OR IMPOSE
ADDITIONAL APPROVAL REQUIREMENTS WITH RESPECT TO, PRODUCTS WE ARE THEN
MARKETING, WE MAY INCUR SUBSTANTIAL ADDITIONAL COSTS AND EXPERIENCE DELAYS OR
DIFFICULTIES IN CONTINUING TO MARKET AND SELL THESE PRODUCTS
Even if the FDA grants to us approval or clearance with respect to any of
our products, it may place substantial restrictions on the indications for which
we may market the product or to whom we may market the product, which could
result in us achieving less sales and lower revenues. The nature of the
marketing claims we are permitted to make in labeling or advertising regarding
our Embosphere Microspheres is limited to those specified in any FDA clearance
or approval, and if the FDA determines that we have made claims beyond those
cleared or approved by the FDA, then we will be in violation of the Federal
Food, Drug, and Cosmetic Act. For example, our products are not specifically
approved for labeling for use for uterine fibroids, which is one of the uses for
which we anticipate physicians may use our products. We may not initiate
discussions with physicians about this use and, if a physician initiates the
discussion, we may only provide peer-reviewed literature.
We may in the future make modifications to our Embosphere Microspheres,
which we determine do not necessitate the filing of a new 510(k) notification.
However, if the FDA does not agree with our determination, it will require us to
make additional filings for the modification, and we will be prohibited from
marketing the modified product until we obtain FDA clearance or approval, which
could delay our ability to introduce product modifications and enhancements into
the market.
Further, the FDA has classified our embolotherapy device into Class III,
which means that even though we have obtained clearance under Section 510(k) of
the Federal Food, Drug and Cosmetic Act to market the device, the FDA could in
the future promulgate a regulation requiring premarket approval of the device
under Section 515 of the Federal Food, Drug and Cosmetic Act to allow it to
remain on the market. A requirement for premarket approval would likely require
us to conduct costly and lengthy clinical trials. We may experience difficulty
in providing to the FDA sufficient data for premarket approval in a timely
fashion, if at all. If we fail to obtain premarket approval, the FDA would
require us to remove our product from the United States market. In addition, the
FDA may require us to conduct a post-market surveillance study on our
embolotherapy device, which is designed to track specific elements of patient
experience with our Embosphere Microspheres product after we have begun
marketing it. If such a study revealed an unexpected rate of adverse events, the
FDA could place further restrictions on our marketing of the device, or rescind
our clearance.
Our legally-marketed products will be subject to continuing FDA
requirements relating to quality control, quality assurance, maintenance of
records, documentation, labeling and promotion of medical devices. We are also
required to submit medical device reports to the FDA to report device-related
deaths, serious injuries and malfunctions, the recurrence of which would be
likely to cause or contribute to a death or serious injury. These reports are
publicly available and, therefore, can become a basis for private tort suits,
including class actions, with respect to our products. Any of these suits would
be costly and time-consuming and would divert our management's attention from
the continued development of our business.
IF WE FAIL TO COMPLY WITH REGULATORY LAWS AND REGULATIONS, WE WILL BE SUBJECT TO
ENFORCEMENT ACTIONS, WHICH WILL AFFECT OUR ABILITY TO MARKET AND SELL OUR
PRODUCTS AND MAY HARM OUR REPUTATION
If we fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to enforcement actions, which could affect our
ability to develop, market and sell our products successfully and could harm our
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reputation and lead to less acceptance of our products by the market. These
enforcement actions include:
- product seizures;
- voluntary or mandatory recalls;
- voluntary or mandatory patient or physician notification;
- withdrawal of product clearances or approvals;
- withdrawal of investigational drug exemption approval;
- restrictions on or prohibitions against marketing our products;
- fines;
- injunctions;
- civil and criminal penalties; and
- withdrawal of premarket approval or rescission of premarket notification
clearance.
IF OUR CLINICAL TRIALS ARE NOT COMPLETED SUCCESSFULLY, WE WILL NOT BE ABLE TO
DEVELOP AND COMMERCIALIZE OUR PRODUCTS
Although for planning purposes we forecast the timing of completion of
clinical trials, the actual timing can vary dramatically due to factors such as
delays, scheduling conflicts with participating clinicians and clinical
institutions, the rate of patient accruals and the uncertainties inherent in the
clinical trial process. In addition, because we have limited experience in
conducting clinical trials, we may rely on academic institutions or clinical
research organizations to conduct, supervise or monitor some or all aspects of
clinical trials involving our products. Accordingly, we have less control over
the timing and other aspects of these clinical trials than if we conducted them
entirely on our own. As a result of these factors, we or third parties may not
successfully begin or complete our clinical trials and we may not make
regulatory submissions or receive required regulatory approvals to commence or
continue our clinical trials in the time periods we have forecasted, if at all.
If we or third parties fail to commence or complete, or experience delays in,
any of our planned clinical trials, then we are likely to incur additional costs
and delays in our product development programs, which could cause our stock
price to decrease.
RISKS RELATING TO OUR INDUSTRY, BUSINESS AND STRATEGY
IF THE MARKET IS NOT RECEPTIVE TO OUR EMBOSPHERE MICROSPHERES PRODUCT, OUR
BUSINESS PROSPECTS WILL BE SERIOUSLY HARMED
Our Embosphere Microspheres are based on new technologies and therapeutic
approaches and we only recently began selling our Embosphere Microspheres
product in the European Union, United States, Canada and Australia. Our success
will depend upon the medical community, patients and third party payors
accepting our Embosphere Microspheres product as clinically useful,
cost-effective and safe. In particular, our success will depend upon obstetrics
and gynecology physicians referring patients to interventional radiologists to
receive treatment using our products in lieu of, or in addition to, receiving
other forms of treatment which the obstetrics and gynecology physicians can
provide directly.
In addition, if we receive negative publicity associated with any adverse
medical effects attributed to embolization treatments generally or our product
specifically, the market may not accept our products as safe. For example,
Embosphere Microspheres are designed to remain in the body permanently. As a
result, there may be some risk that some or all of the Embosphere Microspheres
used in a medical procedure may travel in the blood system beyond the intended
site of action and occlude, or block, other blood vessels, resulting in
significant adverse health effects on the patient or even death. Moreover, to
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use our Embosphere Microspheres correctly for a particular medical procedure,
physicians must select and use the proper size and quantity of Embosphere
Microspheres. A physician's selection and use of the wrong size or quantity of
Embosphere Microspheres could have significant adverse health effects on the
patient, including death. In addition, there is limited data concerning the
long-term health effects on persons resulting from embolotherapy using our
Embosphere Microspheres. If the market determines or concludes that our product
is not safe or effective for any reason, we may be exposed to product liability
claims, product recalls and fines or other penalties and associated adverse
publicity. In addition, we have provided to our customers a satisfaction
guarantee that requires us to accept the return of any inventory and credit the
entire amount of the original order if a properly-trained customer is not
satisfied with the performance of our embospheres. If we experience adverse
publicity or are subject to product liability claims, excessive guarantee
claims, recalls, fines and the like, we will be unable to commercialize
successfully our products and achieve profitability.
IF WE EXPERIENCE DELAYS, DIFFICULTIES OR UNANTICIPATED COSTS IN
ESTABLISHING THE SALES, DISTRIBUTION AND MARKETING CAPABILITIES NECESSARY TO
SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE WILL HAVE DIFFICULTY MAINTAINING AND
INCREASING OUR SALES We currently lack sales, distribution and marketing
capabilities in the United States and have only limited sales, distribution and
marketing capabilities in the European Union. It will be expensive and
time-consuming for us to develop a marketing and sales force and, consequently,
we could be required to delay our product launches. Moreover, we may choose or
find it necessary to enter into strategic partnerships to sell, market and
distribute our products. The terms of any partnership may not be favorable to
us. We currently rely on 17 distributors to sell our products outside of France.
We may not be able to provide adequate incentive to these distributors to
promote our products. If we are unable to successfully employ qualified
marketing and sales personnel and develop our sales and marketing capabilities,
or if our distributors fail to promote our products, we will have difficulty
maintaining and increasing our sales.
IF WE ARE UNABLE TO OBTAIN ADEQUATE PRODUCT LIABILITY INSURANCE, THEN WE MAY
HAVE TO PAY SIGNIFICANT MONETARY DAMAGES IN A SUCCESSFUL PRODUCT LIABILITY CLAIM
AGAINST US
Product liability insurance is generally expensive for medical device
companies such as ours. Although we maintain limited product liability insurance
coverage for the clinical trials of our products, it is possible that we will
not be able to obtain further product liability insurance on acceptable terms,
if at all. Insurance we subsequently obtain may not provide us with adequate
coverage against all potential claims. If we are exposed to product liability
claims for which we have insufficient insurance, we may be required to pay
significant damages which would prevent or delay our ability to commercialize
our products.
IF WE ARE NOT BE ABLE TO COMPETE EFFECTIVELY, WE MAY EXPERIENCE DECREASED
DEMAND FOR OUR PRODUCTS AND PRICE REDUCTIONS
We have many competitors in the United States and abroad, including medical
device and therapeutics companies, universities and other private and public
research institutions. Our success depends upon our ability to develop and
maintain a competitive position in the embolotherapy market. Our key competitors
are Cordis Corporation, a Johnson & Johnson company, Boston Scientific
Corporation and Nycomed Amersham. These and many of our other competitors have
greater capabilities, experience and financial resources than we do. As a
result, they may develop products which compete with our Embosphere Microspheres
product more rapidly or at less cost than we can. Currently, the primary
products with which our Embosphere Microspheres compete for some of our
applications are polyvinyl alcohol, polymerizing gels and coils. In addition,
our competitors may develop technologies that render our products obsolete or
otherwise noncompetitive.
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We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our market and
continue to grow our business. Moreover, we may not be able to compete
effectively, and competitive pressures may result in less demand for our
products and impair our ability to become profitable.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS BY
THIRD PARTY PAYORS, THERE MAY BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS
The availability and levels of reimbursement by governmental and other
third party payors affects the market for any medical device. We may not be able
to sell our products profitably if reimbursement is unavailable or limited in
scope or amount. Currently, only a limited number of insurance companies fully
or partially reimburse for embolization procedures. These third-party payors
continually attempt to contain or reduce the costs of healthcare by challenging
the prices that companies such as ours charge for medical products. In some
foreign countries, particularly the countries of the European Union where our
Embosphere Microspheres product is currently marketed and sold, the pricing of
medical devices is subject to governmental control and the prices charged for
our products have in some instances been reduced as a result of these controls.
Additionally, in both the United States and some foreign jurisdictions, there
have been a number of legislative and regulatory proposals to change the
healthcare system. Further proposals are likely. These proposals, if adopted,
could result in less sales revenue to us, and could affect our ability to raise
capital and market our products.
IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT BE
ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY
The loss of Jean-Marie Vogel, our Chairman, John M. Carnuccio, our
President and Chief Executive Officer, Jonathan McGrath, our Vice-President
Worldwide Research and Development or other key members of our staff could harm
us. Mr. Vogel is the only key employee with whom we currently have a long-term
employment agreement. We also depend on our scientific collaborators and
advisors, all of whom have other commitments that may limit their availability
to us. Our success is substantially dependent on the ability, experience and
performance of these members of our senior management and other key employees,
scientific collaborators and advisors. Because of their ability and experience,
if we lose one or more of these individuals our ability to implement
successfully our business strategy could be seriously harmed.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO
EXPAND OUR BUSINESS
Our future success will depend in large part upon our ability to attract
and retain highly skilled scientific, managerial and marketing personnel,
particularly as we expand our activities in clinical trials, the regulatory
approval process and sales and manufacturing. We face significant competition
for this type of person from other companies, research and academic
institutions, government entities and other organizations. Consequently, if we
are unable to attract and retain skilled personnel, we will not be able to
expand our business.
IF THE STRATEGIC REDIRECTION OF OUR BUSINESS IS NOT SUCCESSFUL, WE MAY BE UNABLE
TO ACHIEVE GROWTH IN OUR BUSINESS
In early 1999, we decided to exit the chromatography business, which had
constituted our core business, to focus on the commercialization of microspheres
for use in embolotherapy and other medical applications. We have restated our
historical financial statements to reflect the discontinuation of our
chromatography business. In addition, 73% of 1999 revenue and 66% of revenue for
the first six months of 2000 included in our restated financial statements was
derived from the sale of products we consider to be nonstrategic and which we do
not expect to constitute a significant portion of our revenue on an ongoing
basis. Our strategic shift from the chromatography business to the
commercialization of microspheres may not prove to be successful and,
consequently, we may be unable to grow our business and achieve profitability.
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IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
SUCCESSFULLY INTEGRATE THE ACQUIRED BUSINESS INTO OURS
We may attempt to acquire businesses, technologies, services or products
that we believe are a strategic fit with our business. We may encounter
operating difficulties and expenditures relating to integrating an acquired
business, technology, service or product. These acquisitions may also absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we may never realize the anticipated
benefits of any acquisition. We may also make dilutive issuances of equity
securities, incur debt or experience a decrease in the cash available for our
operations, or incur contingent liabilities and/or amortization expenses related
to goodwill and other intangible assets, in connection with any future
acquisitions.
IF WE ARE COMPELLED TO ACQUIRE THE REMAINING INTEREST IN BIOSPHERE MEDICAL S.A.,
WE MAY BE REQUIRED TO INCUR INDEBTEDNESS OR MAKE A SIGNIFICANT CASH PAYMENT,
WHICH MAY RESULT IN A DECREASE IN AVAILABLE CASH FOR OUR OPERATIONS
We currently own 85% of the outstanding capital stock of Biosphere Medical
S.A. We have the right to acquire the remaining 15% of Biosphere Medical S.A. in
2004. The purchase price that we are required to pay if we exercise this right
is equal to 15% of the aggregate sales of Biosphere Medical S.A. and sales of
our microspheres subject to our license agreement with Biosphere Medical S.A.
for the nine-month period prior to the exercise of our right. In addition, the
holder of the remaining 15% of Biosphere Medical S.A. has a "put" right to
require us to purchase the remaining 15% in 2004. The purchase price that we are
required to pay if the minority holder exercises this put right is equal to 15%
of the aggregate sales of Biosphere Medical S.A. and sales of our microspheres
subject to our license agreement with Biosphere Medical S.A. for the nine-month
period prior to the exercise of the put right. In any event, the price that we
are required to pay if the minority holder exercises the put right shall not be
less than FF1,800,000 ($264,000 at June 30, 2000). If we are compelled by the
minority stockholder to acquire the minority interest at a future date, we could
be required to make a significant cash payment, which could result in us
incurring debt or a decrease in the cash available to us for our operations.
RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING
WE WILL CONTINUE TO NEED SUBSTANTIAL ADDITIONAL FUNDS, AND IF ADDITIONAL CAPITAL
IS NOT AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OUR OPERATIONS
We will need to raise additional funds to develop and commercialize our
products successfully. If we cannot raise more funds, we could be required to
reduce our capital expenditures, scale back our product development, reduce our
workforce and license to others products or technologies that we otherwise would
seek to commercialize ourselves. We may not receive additional funding on
reasonable terms or at all. Other than a $2.0 million credit line with a bank,
we have no committed source of capital. Sepracor is the guarantor of this credit
line. We have entered into a security agreement with Sepracor pursuant to which
we have pledged to Sepracor all of our assets, including our equity interest in
Biosphere Medical S.A., as collateral for Sepracor's guarantee to the bank. We
are likely to raise more money for working capital purposes by selling
additional capital stock, which is a common strategy for companies such as ours.
Any sales of additional shares of our capital stock are likely to dilute our
existing stockholders. Further, if we issue additional equity securities, the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of our common stock. Alternatively, we may borrow money from
commercial lenders, possibly at high interest rates, which will increase the
risk of your investment in us.
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IF OPERATING RESULTS FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER, THEN OUR
STOCK PRICE MAY DECLINE
Our operating results could fluctuate significantly from quarter to
quarter. These fluctuations may be due to several factors including the timing
and volume of customer orders for our Embosphere Microspheres, customer
cancellations and general economic conditions. We also expect that our operating
results will be affected by seasonality, since we expect our revenues to decline
substantially in the third quarter of each year from the first two quarters of
each year because we do a significant percentage of our business in the European
Union, which typically experiences a slowdown of business during August. Due to
these fluctuations, our operating results in some quarters may not meet the
expectations of stock market analysts and investors. In that case, our stock
price would probably decline.
In addition, a large portion of our expenses, including expenses for
facilities, equipment and personnel, are relatively fixed. Accordingly, if our
revenue declines or does not grow as much as we anticipate, we might not be able
to improve our operating margins. In addition, we plan to significantly increase
operating expenses in the next several years. Failure to achieve anticipated
levels of revenue could therefore significantly harm our operating results for a
particular fiscal period.
RISKS RELATING TO THE PRODUCTION AND SUPPLY OF OUR PRODUCTS
IF WE EXPERIENCE MANUFACTURING DELAYS OR INTERRUPTIONS IN PRODUCTION THEN WE MAY
EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER
If we fail to produce enough products at our own manufacturing facility or
at a third-party manufacturing facility, we may be unable to deliver products to
our customers on a timely basis, which could lead to customer dissatisfaction
and could harm our reputation and ability to compete. We currently produce all
of our Embosphere Microspheres products in one manufacturing facility in France.
We would likely experience significant delays or cessation in producing our
products at this facility if a labor strike, natural disaster, local or regional
conflict or other supply disruption were to occur. If we are unable to
manufacture our products at our facility in France, we may be required to enter
into arrangements with one or more contract manufacturing companies. We do not
currently have contingency plans in place and, if alternate arrangements are
required, we could encounter delays or difficulties establishing relationships
with contract manufacturers or in establishing agreements on terms that are
favorable to us. In addition, if we are required to depend on third-party
manufacturers, our profit margins may be lower, which will make it more
difficult for us to achieve profitability.
Also, manufacturers, including us, must adhere to the FDA's current Good
Manufacturing Practices regulations, which are enforced by the FDA through its
facilities inspection program. Third-party manufacturers may not be able to
comply or maintain compliance with Good Manufacturing Practices regulations. If
third parties fail to comply, their non-compliance could significantly delay our
receipt of 510(k) clearance or premarket approval. For a premarket approval
device, if we change our manufacturing facility or switch to a third-party
manufacturer we will be required to submit a premarket approval application
supplement. For a 510(k) product, a change in our manufacturing location would
require us to change our registration with the FDA.
BECAUSE WE RELY ON A LIMITED NUMBER OF SUPPLIERS WE MAY EXPERIENCE DIFFICULTY IN
MEETING OUR CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN
BUDGET
We currently purchase key components of our Embosphere Microspheres from
approximately 16 outside sources. Some of these components may only be available
to us through a few sources. We generally do not have long-term agreements with
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any of our suppliers. Our reliance on our suppliers exposes us to risks,
including:
- the possibility that one or more of our suppliers could terminate their
services at any time without penalty;
- the potential inability of our suppliers to obtain required components;
- the potential delays and expenses of seeking alternative sources of supply;
- reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternative suppliers; and
- the possibility that one or more of our suppliers could fail to satisfy any
of the FDA's required current Good Manufacturing Practices regulations.
Consequently, in the event that our suppliers delay or interrupt the supply of
components for any reason, our ability to produce and supply our products could
be impaired, which could lead to customer dissatisfaction.
RISKS RELATING TO INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO OBTAIN PATENT PROTECTION FOR OUR DISCOVERIES, THE VALUE OF
OUR TECHNOLOGY AND PRODUCTS COULD DECLINE AND WE MAY NOT BE ABLE TO DEVELOP AND
COMMERCIALIZE OUR PRODUCTS, OR THE COST OF DOING SO MAY INCREASE
We may not obtain meaningful protection for our technology and products
with the patents and patent applications that we own or license relating to our
microsphere technology. In particular, our patents and patent applications may
not prevent others from designing products similar to or otherwise competitive
with our Embosphere Microspheres and other products commercialized by us. For
example, one of the three patents related to copolymers used to make our present
Embosphere Microspheres will expire in June 2001 and relates to the co-polymers
that are used to make the Embosphere Microspheres. We are currently developing a
microsphere that has marking agents, which are materials that will improve
visualization of the Embosphere Microspheres during a procedure, and cell
adhesion promoters, which are materials that will improve the attraction and
bonding between the Embosphere Microspheres and adjacent cell membranes. The
other two patents that relate to Embosphere Microspheres cover chemical coupling
of marketing agents and cell adhesion promoters on the Embosphere Microspheres.
Coupling is a mechanism for incorporating materials into the Embosphere
Microspheres that enables chemical bonding between an additive and one of the
base materials in the formulation. These two patents do not cover the chemical
components of Embosphere Microspheres. To the extent that our competitors are
able to design products competitive with ours without infringing our
intellectual property rights, we may experience less market penetration with our
products and, consequently, we will have decreased revenues.
We do not know whether competitors have similar United States patent
applications on file, since United States patent applications are secret until
issued. Consequently, the United States Patent and Trademark Office could
initiate interference proceedings involving our owned or licensed United States
patent applications or issued patents. Further, there is a substantial backlog
of patent applications at the United States Patent and Trademark Office, and the
approval or rejection of patent applications may take several years.
We have a license to technology invented by a Japanese inventor. However,
the license is limited to a single Japanese patent application. In other words,
corresponding United States and European patent applications were not filed by
this inventor. We intend to file patent applications directed to improvements of
this inventor's technology. However, patent applications may not issue as
patents, and these patents, if issued, may not provide us with sufficient
protection against competitors. Further, we may be required to obtain additional
licenses concerning the Japanese patent application, and any licenses, if
obtained, may not be on terms that are acceptable to us.
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IF WE BECOME INVOLVED IN EXPENSIVE PATENT LITIGATION OR OTHER PROCEEDINGS TO
ENFORCE OUR PATENT RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES OR
SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT
AND COMMERCIALIZATION EFFORTS
In order to protect or enforce our patent rights, we may have to initiate
legal proceedings against third parties, such as infringement suits or
interference proceedings. By initiating legal proceedings to enforce our
intellectual property rights, we may also provoke these third parties to assert
claims against us. Furthermore, we may be sued for infringing on the
intellectual property rights of others, and, as a result, our patents could be
narrowed, invalidated or rendered unenforceable by a court. We may find it
necessary, if threatened, to initiate a lawsuit seeking a declaration from a
court regarding the proprietary rights of others. For example, we were engaged
in patent litigation related to our discontinued business that settled in
December 1997. Intellectual property litigation is costly, and, even if we
prevail, could divert management attention and resources away from our business.
The patent position of companies like us generally is highly uncertain,
involves complex legal and factual questions, and has recently been the subject
of much litigation. We may not prevail in any patent-related proceeding. If we
do not prevail in any litigation, in addition to any damages we might have to
pay, we could be required to stop the infringing activity or obtain a license.
Any required license may not be available to us on acceptable terms, or at all.
In addition, some licenses may be nonexclusive, and therefore, our competitors
may have access to the same technology licensed to us. If we fail to obtain a
required license or are unable to design around a patent, we may be unable to
sell some of our products, which could have a material adverse affect on us.
Our majority-owned French subsidiary, Biosphere Medical S.A., jointly owns
two United States patents and corresponding foreign patents relating to
microsphere technology for use in connection with embolotherapy with
L'Assistance Publique-Hopitaux De Paris, referred to as AP-HP, a French public
health establishment. Pursuant to the terms of a related license agreement with
AP-HP, Biosphere Medical S.A. may be required to seek AP-HP's participation in
any United States legal proceedings it initiates against third parties to
protect or enforce its rights under the jointly-owned patents. If Biosphere
Medical S.A. is not able to obtain the cooperation of AP-HP in any infringement
suit against a third party, then its ability to pursue a law suit and enforce
these patent rights relating to the microspheres could be harmed, which could
have a material adverse effect on us.
IF ANY OF OUR LICENSES TO USE THIRD-PARTY TECHNOLOGIES IN OUR PRODUCTS ARE
TERMINATED, WE MAY BE UNABLE TO DEVELOP, MARKET AND SELL OUR PRODUCTS
We are dependent on various license agreements relating to each of our
current and proposed products that give us rights under intellectual property
rights of third parties. These licenses impose commercialization, sublicensing,
royalty, insurance and other obligations on us. Our failure, or any third
party's failure, to comply with the terms of any of these licenses could result
in us losing our rights to the license, which could result in us being unable to
develop, manufacture or sell products which contain the licensed technology.
RISKS RELATING TO OUR FOREIGN OPERATIONS
IF WE ARE UNABLE TO MEET THE OPERATIONAL, LEGAL AND FINANCIAL CHALLENGES THAT WE
WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS
Our operations are currently conducted primarily through our French
subsidiary. Furthermore, we currently derive substantially all of our revenue
from the sale of our Embosphere Microspheres and other products in the European
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Union. We are increasingly subject to a number of challenges which specifically
relate to our international business activities. Our international operations
may not be successful if we are unable to meet and overcome these challenges,
which would limit the growth of our business. These challenges include:
- failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
- protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
- potentially longer sales cycles to sell products, which could slow our
revenue growth from international sales; and
- potentially longer accounts receivable payment cycles and difficulties in
collecting accounts receivable.
BECAUSE WE EXCHANGE FOREIGN CURRENCY RECEIVED FROM INTERNATIONAL SALES INTO U.S.
DOLLARS AND ARE REQUIRED TO MAKE FOREIGN CURRENCY PAYMENTS, WE MAY LOSE MONEY
DUE TO FLUCTUATIONS IN FOREIGN CURRENCY TRANSLATIONS
Most of our business is conducted in French francs and the euro dollar. We
recognize foreign currency gains or losses arising from our operations in the
period incurred. As result, currency fluctuations between the U.S. dollar and
the currencies in which we do business will cause foreign currency translation
gains and losses, which may cause fluctuations in our future operating results.
We do not currently engage in foreign exchange hedging transactions to manage
our foreign currency exposure.
RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
BECAUSE THE MARKET PRICE OF OUR STOCK IS HIGHLY VOLATILE, YOUR INVESTMENT IN US
COULD RAPIDLY LOSE ITS VALUE AND WE MAY INCUR SIGNIFICANT COSTS FROM CLASS
ACTION LITIGATION
The market price of our stock is highly volatile. As a result, your
investment in us could rapidly lose its value. In addition, the stock market
often experiences extreme price and volume fluctuations, which affect the market
price of many medical device companies and which are often unrelated to the
operating performance of these companies.
Recently, when the market price of a stock has been as volatile as our
stock price has been, holders of that stock have occasionally instituted
securities class action litigation against the company that issued the stock. If
any of our stockholders were to bring a lawsuit of this type against us, even if
the lawsuit is without merit, we could incur substantial costs in defending the
lawsuit. The lawsuit could also divert the time and attention of our management.
BECAUSE SEPRACOR INC. AND OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A MAJORITY OF
OUR COMMON STOCK, THEY HAVE SUBSTANTIAL CONTROL OVER US
As of August 1, 2000, Sepracor Inc. beneficially owned approximately 56% of
our outstanding common stock. In addition, as of August 1, 2000, our executive
officers and directors beneficially owned, in the aggregate, approximately 10%
of our outstanding common stock, excluding shares owned by Sepracor which some
of our directors and executive officers may be deemed to beneficially own. Two
of our directors are executive officers of Sepracor. Sepracor and our executive
officers and directors are able to control all corporate actions requiring
stockholder approval irrespective of how our other stockholders may vote,
including:
- the election of directors;
- the amendment of charter documents;
- the approval of mergers and other significant corporate transactions,
including a sale of substantially all of our assets; and
- the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
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This ownership concentration could cause the market price of our common stock to
decline. In addition, conflicts of interest between us and Sepracor may arise,
including with respect to competitive business activities and control of our
management and our affairs.
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. Our investments in short-term cash equivalents are
subject to interest rate movements. We do not believe that these exposures are
material. We sell and distribute our products worldwide and the payables may be
due in French currency or other local currencies. Therefore, we may experience
gains or losses upon the payment of these account payable obligations.
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. 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.
Proceeds are to be used to fund current operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on June 7, 2000.
At the Meeting, the following matters were voted upon:
1) To elect the following eight Directors:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHELD
--------- -------------
<S> <C> <C>
John M. Carnuccio 8,075,979 1,000
Jean-Marie Vogel 8,075,979 1,000
Timothy J. Barberich 8,075,979 1,000
William M. Cousins 8,075,979 1,000
Alexander M Klibanov, Ph.D. 8,075,979 1,000
Paul A. Looney 8,075,979 1,000
Riccardo Pigliucci 8,075,979 1,000
David P. Southwell 8,075,979 1,000
</TABLE>
2) To approve the Company's 2000 Employee Stock Purchase Plan
covering 50,000 shares of Common Stock.
<TABLE>
<S> <C>
Shares FOR 8,069,529
Shares AGAINST 7,250
Shares ABSTAINED 200
</TABLE>
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ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Stock Purchase Agreement dated July 28, 2000
10.2 Registration Rights Agreement dated July 28, 2000
27. Financial Data Schedule
b) Reports on Form 8-K
Current Report on Form 8-K dated August 4, 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: August 8, 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
------- -------------------------
10.1 Stock Purchase Agreement dated July 28, 2000
10.2 Registration Rights Agreement dated July 28,2000
27 Financial Data Schedule
27
